Stratasys Ltd.: What Investors Need to Know About Its Q4 Earnings and Forward Guidance
Stratasys Ltd. , a leading maker of 3-D printers,announced solid fourth-quarter and full-year 2013 results on Monday. Its total revenue for the quarter jumped 62% to $155.8 million, which includes organic growth of 36%, plus the contribution from MakerBot, which it acquired in 2013. Adjusted earnings per share rose 25% to $0.50, while on a GAAP-basis, EPS improved 56% to $-0.07.
Stratasys' report followed that of fellow 3-D printing industry bigwig 3D Systems, which reported the previous week. Beyond the headliner numbers, here's what investors need to know.
The Q4 nitty-gritty
Some key financial highlights:
- Product revenue increased 66% to $135.6 million.
- Service revenue increased 37% to $20.1 million.
- Overall organic growth was an impressive 36%, which tops prime competitor 3D Systems' strong fourth-quarter organic growth rate of 29%.
- Within the product category, hardware revenue grew 80% (38% organically, excluding desktop printer maker MakerBot's contribution), while consumables revenue increased 40% (33% organically).
- MakerBot generated revenue of $24.9 million, continuing its strong growth; its revenue for all of 2012 was $15.9 million.
- Adjusted gross margin increased to 60.2% from 57.8% in the prior year's period, and adjusted operating margin increased to 20.2% from 19.1%. This is especially notable since MakerBot's operating margin is somewhat less than Stratasys' overall margin (though the company didn't specify how much less).
- $15.5 million, or 9.9% of revenue, was spent on R&D. Stratasys has historically spent more on R&D than 3D Systems, which has largely grown by acquisition. However, 3D Systems considerably boosted its R&D spending in the fourth quarter to 10.7% of its revenue.
Stratasys' 38% organic growth in its hardware business was attributed to broad-based demand across its entire product line. This growth bodes well for continued demand for the company's consumables. Consumables are a key reason both Stratasys and 3D Systems are powering up their efforts to capture as much market share as fast as possible. The more 3-D printers these companies install, the more reoccurring revenue from material sales they should receive, since many, if not most, 3-D printers currently use proprietary materials. Consumables generate higher than companywide profit margins, so they boost earnings.
A few of the quarter's key business highlights:
- Introduction of the Objet500 Connex3 Color Multi-Material 3-D printer, as well as several new MakerBot models.
- Introduction of several new premium materials, including Nylon 12.
- Further development of the MakerBot ecosystem, for which the company has received much praise.
- Partnered with Dell to provide MakerBot Replicator printers bundled with Dell workstations to small and medium-sized businesses.
- Launched the MakerBotAcademy, as education continues to be one of Stratasys' target markets.
Stratasys' introduction of the Objet500 Connex3 is particularly noteworthy, as this is the world's first multi-color printer that can print in multiple materials. So this system opens up many new opportunities in advanced prototyping.
The company's introduction of Nylon 12, which is a particularly strong thermoplastic, also opens up new opportunities in advanced prototyping, as well as in small-run production. Stratasys plans to launch other nylons for use in its Fortus line of printers, too. 3-D printing using nylon is a $200 million market, and given nylon is the third most common engineered thermoplastic used in traditional manufacturing, the market size will surely expand as 3-D printing makes additional inroads into production applications.
Under the launch of the MakerBotAcademy (which has a goal of putting 3-D printers into all U.S. public schools), I mentioned that education remains one of Stratasys' target markets. Stratasys' other target market is the dental market, which is a great space, as it's one of the fastest-growing 3-D printing markets within the larger health care realm.
Guidance for 2014
Stratasys released 2014 earnings guidance in January that was significantly lower than analysts' estimates, and reiterated that guidance and provided additional details on Monday.
The company reaffirmed that it expects adjusted EPS for 2014 in the range of $2.15-$2.25, lower than the $2.31 analysts had been forecasting prior to Stratasys' January announcement. Notably, Stratasys is expected to return to profitability on a GAAP basis, with GAAP EPS expected to be $0.20 to $0.38. It also reiterated revenue guidance of $660 million to $680 million, which was higher than the consensus estimate of $658.5 million.
Stratasys expects organic sales, which exclude MakerBot sales, to grow at least 25%, with additional growth coming from MakerBot, which is expected to grow at a higher rate. Stratasys surely worded this bit as such because it's difficult to forecast MakerBot's growth, given Stratasys has only owned the company since mid-2013 and there is industrywide uncertainty about how quickly consumers will adopt 3-D printing.
The 2014 guidance at the midpoint implies revenue growth of 37.7% and adjusted earnings growth of 19.6%.
Stratasys' planned ramp-up in marketing and R&D activities are the reasons that its earnings are anticipated to be less than analysts had previously expected. Investors should note that the company expects its gross and adjusted operating margins to remain steady, so we're not talking about decelerating profitability for any reason other than the planned increase in operating costs intended to drive long-term growth.
A strong line-up, but needs metals printing capabilities
Stratasys doesn't have a choice but to ratchet up its game if it wants to stay competitive with 3D Systems, as 3D Systems has been going gangbusters forming diverse partnerships, and acquiring some key companies in the last year or so.
Stratasys' acquisition of the popular MakerBot puts the company in a good position to compete with 3D Systems on the desktop end. Additionally, Stratasys has a strong commercial and light industrial printer line-up for uses in design, prototyping, and production.
The only weakness in Stratasys' portfolio is its lack of metals 3-D printing capabilities. Right now, this isn't a huge weakness, as the company is doing well without this material capability. If Stratasys wants to grow considerably over the long-term, however, it needs to offer systems that can print in metals. 3-D printing is still primarily used in prototyping, but is making increasing inroads into manufacturing applications, and this trend will continue. Many industries that are early adopters of 3-D printing for production, including the aerospace, auto, and medical implant industries, widely use metals in their manufacturing processes.
Investors shouldn't be concerned with this issue now, as Stratasys is doing well, and is surely shopping around for the right metals opportunity. If it hasn't found one in a year or two, that might present some cause for concern.
Foolish final thoughts
Stratasys had a strong 2013, and is in a good position for further growth, especially given much of its integration with Objet, with which it merged in 2012, and MakerBot, which it acquired in 2013, is behind it. Acquiring a solid metals 3-D printing company in 2014 would put Stratasys on an even better footing.
While we know Stratasys' profit margins will be under pressure, given its planned ramp-up in operating costs intended to power long-term growth, investors should monitor gross and adjusted operating margins going forward.
If you're looking for some core stock holdings, you might explore these 3 top picks
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love.
The article Stratasys Ltd.: What Investors Need to Know About Its Q4 Earnings and Forward Guidance originally appeared on Fool.com.Beth McKenna has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Stratasys. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.