2020 is clearly the “anything but normal” year but people are resilient and even in such highly unpredictable and unusual times, we adapt. Companies adapt too, as seen in the 3rd quarter reports from the publicly traded additive manufacturing (AM) companies as well as the loud whispers about their still private brethren. It is encouraging to see the strategic initiatives adopted by companies in our ecosystem and how they have adjusted their cost structures to take COVID19 into consideration. While this post is by no means an all encompassing analysis of the 3Q2020 reports, here are some interesting facts, figures, proclamations and hints that have captured my attention.
The companies we are looking at can, at best, be considered anecdotal to the AM industry at large. First, because financials are not available for private companies, such as EOS, or companies that are part of larger conglomerates, such as HP and GE. Second, with the absence of the aforementioned heavy hitters the publicly traded companies are not a representative depiction of the industry. Still, part of the news is that they are strategically moving to become so. The companies we will focus on are the “Main 3″ which are Materialise (NASDAQ:MTLS), 3D Systems (NYSE:DDD), and Stratasys (NASDAQ:SSYS). We’ll also look briefly at the financial results of Proto Labs (NYSE: PRLB) which do much more than just AM, and ExOne (NASDAQ:XONE) which is much smaller than all the rest and at a very different stage.
The chart below summarizes the percentage changes in revenues and stock price over the last 12 months (or YoY=Year over Year) for the 5 companies. Proto Labs had a 9% revenue decline YoY, which is moderate for COVID19 times, while ExOne’s (much smaller) revenue rose more than 50% YoY (see the orange bars in the chart). It may seem appropriate that the market “rewarded” Proto Labs and ExOne with impressive stock price appreciations of 47% and 74%, respectively, over the last year. However, stock market prices are forward looking (rather than “rewards” for past performance) and therefore are more sensitive to the expectations going forward rather than to what’s already happened. Looking at the Main 3 provides a good example: they have all suffered very similar revenue shrinkage of 18-19% (in orange), yet their price appreciation (or lack thereof) is anything but similar. Below we will discuss the strategies presented by the Main 3 going forward but the price appreciation would imply that the market looks very favorably at Materialise’s strategy of expanded software and medical offering and skeptically, but still positively, at the strategic plans of 3D Systems to focus on Industrial and Medical applications. Stratasys has lost value (-10%) over the last 12 months – it has a harder sell to convince the market it is truly heading towards the industrial side (as opposed to its long time bread and butter: the prototyping business). More on this below.
OEM Price to Sales & Strategy
Let’s consider the price to revenues (or P/S = Price to Sales) ratio of the 5 companies in the chart above (in yellow dots relating to the right hand Y axis). This ratio is considered a measure of investors’ expectations of revenue growth and robustness in the future for companies and is strongly affected by their strategy and industry. Traditionally, industrial equipment companies and service businesses have had ratios of 1.5-3 while high flying SaaS (Software as a Service) companies that have sticky and repeatable revenues have enjoyed ratios as high as 10 or even slightly higher. High tech hardware companies and perpetual software license vendors have traditionally had P/S ratios in between those 2 ranges.
The P/S ratios of the 3 OEMs on our list (3D Systems at 3.6, Stratasys at 1.8, and ExOne at 3.2) put them in the industrial ratios zone (SSYS) or slightly above it (for the other 2). For such a cutting edge, high tech industry as 3D printing this is a lackluster ratio level. Both SSYS and DDD have said their strategy is to concentrate on industrial and medical applications in production (as opposed to prototyping). SSYS went so far as to say they want to dominate the polymer side of the market in every technology, including powder bed (where they do not yet have a solution in the market). They also still subtly alluded to the prototyping market in the earnings call. Perhaps this is because Stratasys took a large ($386.2mm) goodwill writeoff due to its Objet reporting unit because of COVID19 related effects. The company estimated it would take 2 years to regain the revenues lost and return the unit to its pre-COVID19 revenue levels. In addition, Stratasys’s announced move to powder bed polymer technologies in favor of industrial applications is expected to change the company’s focus and this should also lower the Objet reporting unit’s revenues. For its part, 3D Systems made visible steps to show it is indeed focusing on an industrial/medical applications strategy. One such step: in November 3D Systems divested its CAD/CAM Cimatron subsidiary (at a loss – it was bought for $97mm in 2015 and sold for $65mm to Battery Ventures). Since Stratasys and 3D Systems were on an acquisition binge in the earlier part of this decade it seems logical that additional divestitures may be coming up.
It is refreshing to hear Stratasys embracing the AM shift to production publicly though one might argue unconvincingly, given its current stock price. It will be interesting to see what other concrete steps both companies will take towards industrial applications. Could it be that the market is not sold on the sincerity of the strategic directions announced by these veteran players so long as they continue to hold businesses that cater to non focus areas? Perhaps it is the lack of initiatives to facilitate industrial adoption in production? Large OEMS like HP and EOS that have been strategically aiming for industrial applications for a while now are catering to this market by expanding their software offerings and the availability of APIs for partners to integrate into industrial solutions and platforms. In contrast, the aloofness in this regard of the 2 3D printing veterans and the unavailability of APIs doesn’t seem like part of a clear strategy toward industrial production. Large industrial companies want to integrate AM into their workflows and that means software and access to APIs. Will this be a wake up call for 3D Systems and Stratasys?
In sharp contrast to the OEMs, veteran Materialise enjoys a whopping 12.7 P/S ratio thanks to its robust software revenues and the impressive performance of its medical business. Unlike last year, medical revenues exceeded revenues from Materialise’s service provider business (by 20%!) while increasing the medical business’s margin to a level approaching that of the highly profitable software business. In addition, the transition of the software business from perpetual licenses to repeatable revenues continues. All of this contributes to Materialise’s hefty current market capitalization of $2.4Bn, which is more than the market capitalization of 3D Systems and Stratasys combined. However, the keys to maintaining and expanding this valuation are the market’s future expectations based on Materliase’s strategy and announcements, which lately have centered around software and medical applications. In medical, Materialise announced several interesting partnerships and new initiatives in eyewear (Ditto) and footwear (Superfeet) and even acquired RS Print and RS Scan from Superfeet as part of the deal. The more thought provoking announcements, I believe, came at FormNext time when Materialise announced it will be releasing store front software for 3D Printing service providers as well as CRM software and ERP software. This is a very important decision and could open a whole new source of software revenues (and, if Materialise acquires more SaaS expertise, then also repeatable and sticky software revenues) in a currently untapped market. A smart market driven strategy! However, in my experience there is a major catch here…
In other industries, most notably the 2D print service providers market which I’ve witnessed first hand, software companies have offered specialized web-to-print, CRM, and most dangerously ERP software that is more affordable and more customized than the ubiquitous and expensive Oracle or SAP solutions. Many service providers shy away from the large expense and complexity of these systems opting for home grown solutions in software or using simple tools like excel and paper folders. It seems logical that if you are offering customers affordable software to replace excels and personal handling and filing, it will be snapped up due to efficiency, cost savings, and ease of use. However, many factors including the variance between different small customers makes an effective solution (that covers a large part of the market’s basic needs) much more complex than may have originally been anticipated. With experienced product management, that has seen such initiatives succeed in other industries, Materialise can use its deep AM and specific service provider expertise to avoid many pitfalls. Still, it is not clear that this will be enough to solve the complexity issue in the minimum viable product for an acceptable ERP solution in such a way that the extra efforts will be rewarded by customers. People can always stay with their excels, as inefficient as that is. To lure them away, the ERP solution must allow them to continue with their existing practices with minimum disruption and doing so for many service providers with esoteric practices and proprietary procedures invariably complicates things enormously. I hope and believe that since Materialise is a veteran of our industry and knows it inside out, it probably has the best chance of achieving this but there are many potholes on this road, I wish them luck navigating them – it will be wonderful if they succeed!
For more insights and information follow us on LinkedIn or subscribe to our newsletter for weekly updates. The picture up top is the coin necklace by Michiel Cornelissen. The chart was prepared by me (Lee-Bath Nelson), and the stack of insoles above was photographed at Hanover Messe 2019 by Tessa Blokland.