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?
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.
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.
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.
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