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Stratasys (NASDAQ:SSYS) made new highs last week, after 3D Systems (NYSE:DDD) reported third quarter earnings. 3D Systems' report showed strong momentum across all categories, with acceleration in revenue growth. The attention turns to Stratasys this week, and I expect the company should beat top and bottom line estimates, given the strong results posted by 3D Systems. However, the focus of my attention (and probably of the Street) will be similar to what I was looking for in 3D Systems' report: revenue growth and progress on the consumer front. The trends in the fundamentals should be similar, and the consumer segment should boost the top line. Bottom line growth is of less importance at the moment, since both companies are investing heavily into expanding their market presence and product offerings.

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Transformative period for Stratasys and 3D Systems

The last couple of quarters have been transformative for Stratasys and 3D Systems. Both companies have been very active on the acquisition front, with 3D Systems acquiring almost 40 companies in the last couple of years, while Stratasys made two strategic mergers, with Objet in 2012 and most recently with Makerbot. The Objet merger is showing results, as Stratasys is taking advantage of cost synergies and increased cross-selling opportunities. The Makerbot deal is expected to be dilutive to this year's earnings and accretive by the end of 2014, and puts Stratasys in a competitive position with 3D Systems, which was ahead of Stratasys in the consumer segment.

Q3 earnings preview

The focus of investor attention in the third quarter report will be on revenue growth, which should accelerate on an adjusted basis (taking into account the Objet merger). We should see increased synergies from the Objet merger, as the company moves towards the end of the integration process. During the second quarter, the company has achieved integration of the sales and marketing, as well as service team integration. With the integration process being in its later stages, Stratasys should see increased cross-selling opportunities, and ramped up growth in the following quarters.

Management noted in the Q2 conference call that the company's cross-selling initiatives are also generating tangible results in China, as customers have begun to recognize the value of the company's complementary product lines. In my previous article on Stratasys, I noted that the company will continue to see rapidly expanding revenue growth in the Asia-Pacific region. Stratasys has also entered a distribution agreement with the Aurora group, making Aurora the exclusive distributor of Stratasys' Idea Series of professional desktop 3D printers. Aurora has over 500 locations throughout China, and gives Stratasys a major presence in the country. Aurora will also provide hands on training and handle regular maintenance for end users. Asia-Pacific has been the fastest growing region for both Stratasys and 3D Systems, and remains the best potential market for both companies to expand in the future.

Stratasys is also getting aggressive with its consumer initiative, following 3D Systems' efforts. Stratasys has signed an agreement with Ingram Micro, which will resell MakerBot's $2,200 Replicator 2 3D printer and $1,400 Digitizer 3D scanner. In early August, Makerbot entered a retail partnership with Microsoft. Under the terms of the agreement, the "MakerBot Experience" in-store demos will be set up at 17 Microsoft Stores nationwide. Given the strong results in the consumer segment by 3D Systems, Makerbot might provide further upside for Stratasys and the company might show increased revenue and raise full-year guidance in the third quarter report.

Makerbot might have a negative impact on gross profit margin, as it generally has lower gross margin than Stratasys. On the other hand, the Objet merger synergies should have a positive impact on profit margins. Since Makerbot accounts for a small portion of the overall revenue, and given the merger synergies and a potential favorable product mix, I expect margins to be flat or slightly positive in Q3.

Conclusion

Given the 3D Systems' earnings report, which showed strong momentum across all categories, Stratasys should follow suit and beat its top and bottom line estimates (although 3D Systems did not exceed bottom line estimates). Bottom line results are of less importance at the moment, as Stratasys needs to focus on further market penetration, especially when considering 3D Systems' aggressive expansion and increased R&D and sales and marketing spending. The full-year revenue guidance will also be very important, and it would be negative for the stock price if guidance stays the same.

Source: Stratasys Set To Beat Top And Bottom Line Estimates