Stratasys Is Set To Benefit From The Growing 3-D Market

Aug.29.14 | About: Stratasys, Inc. (SSYS)

Summary

Stratasys' latest quarter brought an increase of 67% in the top line. Adjusted earnings improved by 62%.

Growing application of 3-D printing, in both commercial and consumer markets, justifies the higher expenditure the company is doing to establish brand loyalty.

Improving earnings guidance confirms that Stratasys is benefiting from market expansion.

In my earlier article on Hewlett-Packard (NYSE:HPQ), I mentioned how the company is moving away from PCs and printers to networking. When one company moves away from a market, it is either because the market prospects are weak, or because there are other dominant players. One such player in the printing arena is Stratasys Ltd. (NASDAQ:SSYS). The company has stripped out a narrow economic moat by carefully focusing on 3-D printing technology.

As a result, Stratasys share value has gone up by 25% in the last three months. In this article, I will go through the company's latest quarter and bring the important details to investors' attention. I will later discuss the future growth potential of this organization.

Second Quarter

During the period, the events that were witnessed show that Stratasys is growing really fast. The company's non-GAAP revenue increased by 67.6% to $178.5 million, as compared to last year's quarter. Stratasys observed improvement in the revenues generated both from the products and the services segments, which was the result of a healthy demand for its higher-margin products and services.

The company also witnessed higher sales for its desktop 3-D printers. The growth, as compared to last year's level, was nothing small. During the quarter, the company shipped 14,909 units of 3-D printers and other additive manufacturing systems, an increase of 1082% compared to 1,261 units sold in the year-ago quarter. This growth is the result of greater demand for MakerBot products and the higher-end Fortus and Connex systems.

Adjusted gross margin increased by 73 bps, mainly due to a higher revenue base and a favourable product mix. However, operating margin contracted by 267 bps. The decrease was due to the costs relating to MakerBot's acquisition, and marketing and research related to product innovation. At present, selling, general and administrative expenses make up nearly 80% of the company's total operating expense. This is a very big percentage share. Nevertheless, the present investments are going to benefit Stratasys in the long run. The company is in its expanding phase and consumers need to know about the benefit the company has to offer. Therefore, the very nature of the costs is controllable and shouldn't be a concern for investors.

The net result of the above costs was that the company reported a loss of $173 million. Nonetheless, the adjusted net income came in at $22.2 million, 62% higher than the year-ago quarter. All in all it can be seen that the company's higher marketing is becoming effective because of the top-line growth rate. It is the bottom-line pressure which is giving losses. However, once the company establishes its footprint, these costs should minimize and losses should turn into profits.

An example of how the company is providing value to its consumers could be seen through the recent adoption of 3-D printing in UK's hospitals. Replica 3DM is using Stratasys' 3-D printers to support twelve National Health Service "NHS" hospitals in the planning of patient surgery prior to an operation. Consequently, this is having a considerable impact on the duration of surgical procedures, leading to substantial reduction in surgery costs.

Another example comes from Nike (NYSE:NKE), which is using the same technology to design better football shoes. The growth doesn't stop at business and medical applications. Gartner predicts that the application of 3-D printing can be further extended to consumer use. However, it will take another five to ten years for this to happen. Right now, business and medical applications for 3-D printers will drive the growth for the next two to five years.

To prepare for the longer term, the company has already started marketing its products to hobbyists, educators and others in the consumer market. Stratasys products are now available in Microsoft's (NASDAQ:MSFT) retail stores, Micro Centre computer stores, and selected Home Depot (NYSE:HD) stores. This move is a solid step to prepare ahead of rivals, eventually giving Stratasys an advantage when the technology becomes cheap enough to become affordable to the consumer class.

Bottom Line

Buoyed by the higher adoption of 3-D technology and printers, Stratasys has raised its annual guidance. For this year, the company expects its revenues to range within $750-$770 million, higher than the previous target of $660-$680 million. The company has also updated its long-term operational targets, which include a 25% organic revenue growth.

Operating expenses, related to marketing and research, are expected to continue increasing this year to support the growing demand for Stratasys' products. This, together with higher capital expenditure for increasing the manufacturing capacity, will push margins downward in the near term. However, the long-term future is all good for Stratasys. It is a solid stock with tremendous return potential on offer. Therefore, the company holds a buy rating.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.