Stratasys: Changing The Outlook In 3-D Printing Services Business

Apr.28.14 | About: Stratasys, Inc. (SSYS)


Stratasys made three acquisitions in April which are going to significantly expand the company’s services business.

This move shows that Stratasys means business, and it should compete more aggressively with 3D Systems, which has acquired more than 40 companies over the last few years.

The combined services revenue will close the revenue gap between Stratasys and 3D Systems.

April was a very active month for Stratasys (NASDAQ:SSYS). Stratasys acquired three companies, spending a large part of its cash balance. The acquisitions will help further solidify the company's services business and help it better compete with 3D Systems (NYSE:DDD) and other companies in the additive manufacturing segment. While the general market selloff might bring their share prices lower in the following weeks, I believe we are approaching a bottom in the 3-D printing group, which may be reached in the next couple of weeks or months. 3D Systems' earnings report will certainly have a strong impact on Stratasys' share price and may help determine the short and medium-term price direction of the 3-D printing group.

The latest acquisitions will help strengthen Stratasys' services business

On April 2, Stratasys announced that it will acquire Solid Concepts and Harvest Technologies:

Solid Concepts is the largest independent additive manufacturing service bureau in North America and a fast growing partner to RedEye, Stratasys' existing digital manufacturing service business."

Solid Concepts had $65 million in revenue in 2013 and has 6 U.S. facilities and 450 employees. Stratasys will pay up to $295 million for Solid Concepts, while the terms of the Harvest Technologies acquisition were not disclosed. Harvest Technologies has 80 employees.

Stratasys intends to combine Solid Concepts and Harvest Technologies with RedEye to establish an additive manufacturing services business unit. The new services unit will present a strategic platform which will help meet the additive manufacturing needs of the company's customers. Solid Concepts has deep knowledge of medical and aerospace verticals, while Harvest Technologies has experience in parts production, as well as materials and systems know-how. There are also opportunities for cross-selling synergies and financial benefits. The transactions are expected to be accretive to Stratasys' Non-GAAP EPS within the first months after closing (the closing of transaction is expected in Q3).

Two days later, Stratasys announced that it will acquire Interfacial Solutions for an undisclosed amount. Interfacial Solutions is a provider of thermoplastics R&D and production services, and has been a production partner to Stratasys over the past three years. The acquisition should strengthen Stratasys' R&D efforts and help increase materials production space and capacity.

These acquisitions will help Stratasys to better compete with 3D Systems and close the revenue gap of their respective services business segments. At the end of 2013, Stratasys' services revenue was $69.5 million while 3D Systems' services revenue was $157 million. Solid Concepts' 2013 revenue was $4.5 million lower than Stratasys' services revenue, and it will certainly be the most influential acquisition on the company's top and bottom line down the road. The other two acquisitions likely account to less than one third of the Solid Concepts' value, but this is only a speculation on my part, as we do not have information about the value of these deals and of their financial performance.

Comparing the trends in the services business segments

In the table below, you can see the quarterly services revenue and growth levels of Stratasys and 3D Systems. Stratasys' growth has been steady throughout the year and has accelerated in Q4, while 3D Systems' services revenue growth was slower in the first half of 2013, and the growth picked up significantly in the second half of the year. I expect that the services revenue growth momentum of both Stratasys and 3D Systems should be sustained in 2014 and beyond, as they expand their businesses. Stratasys' growth should accelerate in Q3 and beyond as the before mentioned acquisitions are integrated and as the company reaps the benefits of the acquisitions (cost and cross-selling synergies and increased expertise of the new and combined services unit and accelerated new materials development).

Source: Stratasys earnings reports, 3D Systems earnings reports

Q1 earnings reports in the 3-D printing group will determine the short and medium term price direction of the group

3D Systems will report earnings on April 29, and it might surprise investors, since customers delayed purchases due to new product launches. Stratasys will release its Q1 report on May 9, and these reports should have a significant impact on the short and medium-term price direction of the 3-D printing group. Both 3D Systems and Stratasys should beat estimates and guide FY 2014 revenue higher. This might be enough to put an end to the decline in their share prices. However, the situation in the general market is deteriorating, and might put additional selling pressure on the 3-D printing group.


The latest acquisitions will strengthen Stratasys' services business, and accelerate the growth of the segment. It will also help the company to better compete with 3D Systems and other competitors in a rapidly evolving and expanding 3-D printing market. The two companies are slated to report earnings soon, and the events should determine the short and medium-term price direction of the 3-D printing group. I am optimistic and expect both companies to beat their top line estimates, while I am not sure on the bottom line, because the increased investments might weigh on their earnings. But I believe that revenue growth and FY 2014 revenue guidance will be the most important metrics, and this is what we will need to look at in order to gain perspective on the future of Stratasys and 3D Systems. In 2015, the focus should be back on margin expansion and earnings growth. The other thing to watch is the general market, as the additional selling pressure might push their share prices further down.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.