If you're following Stratasys (SSYS -1.67%), you've likely read the company's first-quarter 2014 earnings release, as well as an earnings article summarizing the leading 3D printing company's results, which were released on Wednesday.
Briefly, Stratasys beat both revenue and adjusted earnings estimates, though the market sent the stock tumbling 11% after the company notched down its full-year 2014 adjusted earnings by $0.04 on both ends of the range. This was to account for expected fourth-quarter development costs associated with its recent GrabCAD acquisition.
My purpose isn't to rehash the results, but to supplement the earnings data with color from Stratasys' conference call. There's a wealth of information you can glean from tuning into these calls. Here are four things that you should know about:
As with the last two quarters, sales of high-end Fortus 3D printers remain strong. Fortus printers are targeted to production applications. Source: Stratasys.
Stratasys is "ready" for Hewlett-Packard's entrance into the market
From CEO David Reis' response to an analyst's question:
I don't think we have enough information on it exactly, what... product... is going to result from this technology. I could also add that our... customers have... a variety of demands from us. And I don't think that a single technology would be able to answer all those demands.... I think HP joining the market is good news and Stratasys is going to be ready.
Several analysts asked about management's thoughts on Hewlett-Packard Company (HPQ 0.36%) entering the 3D printing market. This was to be expected, given HP's unveil last week of its new "Multi Jet Fusion" 3D printing technology, and the printer based upon this tech that it plans to bring to market in 2016.
The technology leverages HP's deep expertise in thermal inkjet 2D printing. The printer is reportedly 10 times faster than those powered by the leading 3D printing technologies, while sporting high precision, high resolution, and brilliant color capabilities -- and it will be priced below the competition.
While Reis' statement is not very telling, and one that would be expected of a CEO, I'm in full agreement with it. While HP's technology looks very impressive, there weren't enough details released to accurately get a full sense of the competitive threat that it will present. Further, no matter how compelling a product, it is highly unlikely that any one technology will work best for the myriad of 3D printing applications and materials.
HP shouldn't be underestimated, as it has deep pockets, decades of experience in inkjet 2D printing -- which shares key attributes with 3D printing -- and already counts as customers some of the enterprise companies it will likely be targeting with its 3D printer offering. Nonetheless, unveiling a compelling product and executing on plans to successfully bring it to market are two very different things.
(Look for a deep-dive article on Sunday exploring how HP's 3D printer might affect Stratasys' business.)
Results got a boost from a low effective tax rate
From CFO Erez Simha's response to an analyst's question:
The effective tax rate is a bit lower than what we estimated. We leveraged the opportunity to invest more and capture more opportunities. And don't forget that the tax structure is part of our unique business model and... [allows] us to invest more and capture more opportunities in order to grow faster.
There are two takeaways on this one. First, Stratasys' effective tax rate was 3.8% for the quarter compared to 14.8% for the same period last year. That means the company's year-over-year EPS growth rate got a boost from the tax rate. So, while Stratasys' results were solid, they were not as good as they might appear.
Second, as Simha noted, it's important to remember that Stratasys' tax structure is unique, at least among the U.S.-based 3D-printing players. Stratasys has long been headquartered in Minnesota, but its merger with Israeli-based Objet in 2012 resulted in dual headquarters. The foreign headquarters gives it a tax advantage.
GrabCAD acquired to strengthen ecosystem and to obtain talent
From Reis' prepared remarks:
Future success with our industry will go beyond simply providing the market with best hardware and material solutions. We believe we must develop a leading 3D printing ecosystem to improve accessibility to our solutions and allow us to enhance customer intimacy. To advance this strategy, we recently announced the acquisition of GrabCAD, a leading cloud-based CAD collaboration platform and community site.
From Reis' response to an analyst's question:
What we got with GrabCAD is a leading team of software professionals, which we consider to be the top of the industry...
There was much talk on the call about GrabCAD, the acquisition Stratasys closed in late September. We already knew Stratasys bought the company to help strengthen its ecosystem, though Reis' comments indicate that this was very much an "acqui-hire," too -- that obtaining the company's software professionals was a huge part of the deal's appeal.
Stratasys obviously feels strongly that GrabCAD was a "don't miss" opportunity. Stratasys has been very focused and disciplined in its acquisition activities – and buying a company that currently provides no incremental revenue, and is expected to negatively impact Q4 adjusted earnings by $0.03 to $0.05 per share, was a bit unusual. Reis' comments about the critical importance of building an ecosystem are spot on, in my opinion -- one only needs to look to Google and Apple for support of this opinion -- but only time will tell if the GrabCAD acquisition turns out as positively as Stratasys' management believes it will.
Stratasys just announced 11 new products
From Reis' prepared remarks:
[Y]esterday we announced two new Fortus FDM systems and eight new PolyJet systems including a significant expansion of our successful Connex line of multimaterial 3D printers.
Additionally, we strengthened our material portfolio with the ULTEM 1010 resin for the Fortus 900mc. These product announcements were previously scheduled to come, but based on anticipated strong demand, we announced the new products yesterday at the CMAA Trade Show in Las Vegas.
Stratasys announced 10 printers and one new material on Tuesday. This is an unprecendented number of new product releases at once, and should bode well for its future results. Its Fortus printers, which are used primarily for production applications, and its Connex multimaterial printers, which are geared toward advanced prototyping applications, are both high-end lines that sport higher profit margins than the company's overall 3D-printer profit margin. Both lines have been selling well, and helping drive the company's strong organic growth in 2014; Stratasys has experienced organic growth of 33%, 35%, and 35%, respectively, in Q1, Q2, and Q3.
Final thoughts
Stratasys turned in a solid quarter. The market overreacted to the cut in the full-year 2014 adjusted earnings, in my opinion. Stratasys stated when it closed on GrabCAD that its Q4 earnings would be negatively affected by $0.03-$0.05; so its $0.04 cut in 2014 adjusted EPS shouldn't have come as much of a surprise.
While we didn't explore cash flow in this article, investors should keep their eyes on Stratasys' cash flow situation going forward. Given the company closed on four acquisitions in the quarter, it's not concerning at this point that cash flow suffered. However, we'd like to see this situation start to reverse itself during the next few quarters, as integrations result in some synergies. Hopefully, Stratasys will remain focused and disciplined in its acquisition activity, as there's surely the temptation to "acquisition up" in light of the 3D-printing market becoming increasingly competitive.
The main challenge ahead for Stratasys appears to be HP's entrance into the market. Look for a deep-dive article exploring this topic on Sunday.
