Update: Is Another Acquisition In The Works For Stratasys?

| About: Stratasys, Inc. (SSYS)


Stratasys reported strong earnings, beating expectations, and strong balance sheet with over $570 million in cash and equivalents.

Managerial statements during the subsequent earnings conference call hinted again at more acquisitions/investments, particularly into its new service bureau assets.

When drilled during the analyst Q&A regarding synergy with the new acquisitions, management, for the most part, beat around the bush.

My past investment thesis that ZMSPF appears to be a likely acquisition for SSYS seems more validated following the recent earnings report and conference call.

Earlier this month, I wrote that Stratasys (NASDAQ:SSYS) appeared poised for additional acquisitions. Based on Stratasys' past acquisitions, CEO commentary, and cash position; I posited Zecotek (OTCPK:ZMSPF) as a likely acquisition target. Regarding Stratasys' intent for additional M&A action, I stated that investors should expect additional transparency during Stratasys' Q2 '14 Earnings Call. What follows are a series of excerpts from the conference call that reinforce the original thesis.

All quotes are sourced from Seeking Alpha's Earnings call transcript and are presented in the chronological order of when they were stated. Bold text added as emphasis.

CEO - David Reis

"As we begin the second half of 2014, we expect our positive momentum to continue. Accordingly, we have raised our financial guidance and long-term revenue growth targets. In addition, we continue to position Stratasys for the long-term growth, through improvements in our organizational structure, as well as additional investments in channel and product development.

We will also look for additional strategic acquisitions, such as our recent acquisition of Solid Concepts and Harvest Technologies, two companies that we believe will contribute exciting new growth opportunities for Stratasys."

VP IR - Shane Glenn

"Growth in operating expenses in the second half of 2014 will include significant investments to support the integration and alignment of the recent acquisitions of Solid Concepts and Harvest Technologies. We also expect significant non-recurring integration cost related to the Solid Concepts and Harvest Technologies integration."

Q&A Session

Samuel Eisner - Goldman Sachs

"And then, just perhaps a follow up on margins here, you did bring down your long-term expectation for operating margins, just curious what has been baked into that, are you assuming any synergies you just mentioned regarding the service bureau [Solid Concepts/ Harvest Technologies] transactions?"

COO/CFO - Erez Simha's Response

"I would say I would slip into the first one, we believe that we can capture higher growth for the company. For this higher growth, we will probably need to invest a little bit more ahead of time in order to generate this growth. And more importantly, that the last three acquisitions that we did, MakerBot, Solid Concepts, and Harvest, carry lower gross margin and lower operating margin that has an impact on the consolidated results of the combined business. However, please no that we didn't change the net margin of the long-term."

Ken Wong - Citigroup

"And then, just a quick follow up on the recent question about the gross margins of Solid Concepts and Harvest, and you guys talked up some synergies as you bring these businesses together, I mean would you imagine that the gross margins overall, those two would trend up towards your current services gross margins over time?

David Reis

"It's a little bit difficult to estimate today. We mentioned before we have two steps in the process. One of them is, first of all, to integrate the three services groups into one company which we started as soon as we closed the transactions. I expect this by definition to create some synergies which should improve gross margins. Later on, when we've integrated them into the overall Stratasys, we think we'll get some more benefits. I think it's a little bit too early to estimate how good it's going to be."

Bobby Burleson - Canaccord

"---Stratasys has hired a new VP of Strategic Accounts and you're doing a top-down kind of ROI analysis for some global manufacturing customers, et cetera. How does Solid Concepts help play into that? And given the decent number of SLA machines they have, how are you guys making sure that those conversations kind of look at the technologies that are available kind of agnostically?

David Reis

"Strategy in this respect is really customer focused, and what you observed in the last few years that our customers are approaching us, asking to give them a full solution for the additive manufacturing need, and we believe today with out ability or the combination of offering both a hardware, consumables, professional servicing and consulting, end-parts together is what is required by our customers, and what we did in the past few years and we doing very good progress in this respect is structuring our own operations to fit this customer need.

The service bureau activity specifically is a great fit into it, because if you look on our large customers, they sometime requirements for hardware, sometimes for parts, sometimes for consulting or any combination of the above, so basically we're structuring ourselves in order to serve the customer better, and then the service bureau is part of this concept."


Although Stratasys posted a record quarter with strong growth metrics posted across the board, company commentary echoed many of the points stated in my earlier article. The statements appear to confirm that Stratasys will continue to acquire key assets, and they are well primed to do so, having reported a holding of $577.9 million in cash and cash equivalents, and short-term bank deposits for the second quarter.

Both the company and analysts seem to be distinctly aware of the current lack of expected synergy between Stratasys and its new acquisitions. In response to the series of questions by multiple analysts regarding Solid Concepts and Harvest, management for the most part bobbed and weaved around, lacking an assertive answer. An additional acquisition bridging Stratasys and its new service providers appears to be the simplest solution, and for reasons fully discussed in my previous article, Zecotek stands out as an attractive asset.

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