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3 Takeaways From the Stratasys Earnings Report

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Thanks to a strong earnings report, shares of Stratasys (NASDAQ: SSYS  ) were off to a solid start this morning. Including results from the company's recent merger with Objet, the high-end 3-D printing company reported that fourth-quarter revenue increased 23% year over year to $96.4 million. On a non-GAAP basis, net income increased 40% year over year to $16.3 million, or $0.40 per share. For the full year, revenue increased by 30% year over year to $359 million, allowing Stratasys to bring home 60% more in net income than 2011. Going forward, the company expects 2013 revenues to grow between 20% and 24% over 2012 revenues.

On the surface, these results appear to be strong, and the 3-D printing growth story for Stratasys remains intact. However, the surface may not always provide enough information for a high-growth investor to make the best decision.

Strong organic growth?
Although there wasn't any share split confusion to deal with, as when 3D Systems (NYSE: DDD  ) reported, Stratasys' method of reporting revenues was equally confusing. This was the first quarter that Objet and Stratasys were considered as one entity, and the way the financials read, it appears as if we have a pre- and post-merger look at the company's legacy business, but the reporting doesn't explicitly state that. We've reached out to Stratasys for further clarification. Assuming this interpretation is correct, Stratasys' legacy business appears to report revenue growth far above 3D Systems' 45.4% acquisition-driven growth rate.

For the quarter, Stratasys seems to have reported a 63% year-over-year increase in its legacy business, indicating that the high-end 3-D printing market remains extremely robust. Although this is a potentially welcomed sign for investors, I find it somewhat problematic that Objet could be dragging down Stratasys' growth rate. After all, isn't the purpose of a merger to increase revenue growth and form synergies?

Weaker projection
When 3D Systems reported last Monday, it projected that its 2013 full-year revenues will grow somewhere between 24% and 37% more than its 2012 revenues, far above where Stratasys projected. Granted, 3D Systems operates in more segments than Stratasys, but the fact that Stratasys' top end of its growth expectations represents the low end of 3D Systems' range doesn't say to me that Stratasys is in the best position to capture the most market share in the years ahead. It's clear that Stratasys is primarily focused on pursuing the high-end 3-D printing market, but for investors, this laser focus could mean they're leaving tremendous growth opportunity other 3-D printing segments may offer.

Two-sided margins
Remember Stratasys' strong organic growth rate I told you about? It actually came at the expense of gross profit, which suggests that Stratasys could be losing its pricing power as the competition intensifies. The company's fourth-quarter gross profit margin declined about 12% to 46.2% since the fourth quarter of 2011. For the full year, the results were less pronounced and gross profit declined by only about 3% since 2011, which could mean these alleged pricing issues may have just begun. Regardless, this raises a caution flag and should continue to be watched in the coming quarters.

Once Objet's results are included, these margin concerns disappear, indicating that Objet is a huge contributor to profitability. For the quarter, Stratasys' total gross profit margin increased 7% year over year on a GAAP basis, and on a full-year basis, gross margins improved by 12%. In this context, it becomes clear that Stratasys chose to sacrifice revenue growth rates in return for increased profitability. In theory, Objet should continue to offset the margin weakness Stratasys' core business is currently facing.

Unknown outcome
According to Wohlers Associates, the leading research firm for 3-D printed related insights, the 3-D printing industry as a whole is expected to continue growing in the strong double digits in the years to come, ultimately growing into a $6.5 billion industry in 2019. With full-year sales hovering below $360 million, it seems there's a tremendous amount of growth potential for Stratasys in the years ahead.

However, a lot can change over the next six years, and the established leaders of today may become the laggards of tomorrow. Stratasys offers a highly concentrated investment in the high-end plastic segment of the 3-D printing industry, and it appears that competitive pressures have begun threatening its core profit margins. If the industry were to evolve away from Stratasys' focus, it may be forced to play catch-up in areas where it lacks expertise. Given the relatively new state of the 3-D printing industry, I still believe 3D Systems makes a better overall 3-D printing investment.

3D Systems is at the leading edge of a disruptive technological revolution, with the broadest portfolio of 3-D printers in the industry. However, despite years of earnings growth, 3D Systems' share price has risen even faster, and today the company sports a dizzying valuation. To help investors decide whether the future of additive manufacturing is bright enough to justify the lofty price tag on the company's shares, The Motley Fool has compiled a premium research report on whether 3D Systems is a buy right now. In our report, we take a close look at 3D Systems' opportunities, risks, and critical factors for growth. You'll also find reasons to buy or sell, and receive a full year of analyst updates with the report. To start reading, simply click here now for instant access.

Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 05, 2013, at 11:45 AM, nakrak wrote:

    When did DDD split, was it a 2 for 3 split.



  • Report this Comment On March 05, 2013, at 12:08 PM, TangoXray7 wrote:

    Nakrak - DDD split 3 for 2, not the other way. The split was distributed as a stock dividend to owners of record 2/15 and became effective 2/25. Much of the recent decline in 3D's stock can be attributed to profit taking resulting from the split, as well as investor confusion since the split was not well publicized.

    I agree with the author that in this space DDD is a better investment choice since none of the other big players provide a metal parts fabrication solution. I'm only aware of a few small companies in Germany that compete with 3D Systems in that space and although they have some very fine products they don't have the software or sales channel strengths we find in 3D Systems. DDD Continues to broaden it's portfolio and has a very healthy R&D budget combined with a CTO who literally invented 3-D printing. Their patent portfolio is impressive and their acquisition strategy appears very effective.

    Having watched cisco grow to dominate the routing and switching industry largely through acquisition and successful integration during the 90's I feel comfortable with DDD's approach. Others with less experience might not.

  • Report this Comment On March 05, 2013, at 1:23 PM, tossemail wrote:

    Please learn basic accounting rules before writing such nonsense. The merger with Objet closed Dec. 1, 2012 and therefore all Q4 numbers included one month of Objet contributions. Furthermore all your comments about gross margin are wrong. Gross margin increased - pro forma and GAAP.

    Do not waste the time of investors when you don't understand anything about the subject you are writing about.

  • Report this Comment On March 05, 2013, at 5:55 PM, TangoXray7 wrote:

    TossEmail? That's a bit transparent isn't it? Maybe you should try JunkEmail?

  • Report this Comment On March 06, 2013, at 9:54 AM, TMFTopDown wrote:

    @tossemail --

    The company should have been a more clear about what transpired during the quarter. One sentence should would have cleared this right up.

    The reason why I'm not a fan of pro forma is because it isn't a realistic depiction of what actually happened. It's more like a pretend world since Objet and SSYS weren't together a year ago.

    On that basis, when you actually look at the gross margin figures that were non pro forma, gross margin actually did decline.

    Thank you,

    --Steve Heller (TMFTopDown)

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