The 3D printing industry is on a roll and so is Stratasys (SSYS, Financial). Despite competition from more established players such as 3D Systems (DDD, Financial), Stratasys has managed to keep its growth momentum intact and its recent fourth-quarter results illustrate the same.
Recent results
Stratasys generated 36% organic revenue growth in the previous quarter, driven by the Stratasys-Objet merger synergies and a rapidly expanding market for 3D printing and additive manufacturing solutions worldwide. Stratasys brought in revenue of $156 million in the fourth quarter, reporting 62% revenue growth over last year. MakerBot contributed $24.9 million in revenue during the quarter.
Strong revenue growth, along with margin expansion, led to record quarterly earnings. Net profit grew 59% to $25.8 million, or $0.50 per diluted share, from $16.3 million, or $0.40 per share, last year. The strong performance was accompanied by positive management commentary as Stratasys sees solid growth in the future.
The way ahead
Stratasys observed strong demand across all product categories during the fourth quarter, driven by merger revenue synergies and the rapidly growing 3D industry. The rapidly growing desktop category led to strong sales momentum, enabling MakerBot to perform impressively.
Stratasys' gross margin increased both year-over-year and quarter-over-quarter, driven by sales of its higher-margin products and operational improvements. The margin expansion, combined with its strong sales performance, contributed to a record quarter in terms of profit and EPS.
In addition to Stratasys' strong Q4 financial performance, it continues to aggressively expand its global market presence through channel extensions and strategic partnerships. A focused investment in R&D and product development enabled it to introduce several new systems and materials.
Finally, with the first phase of the Stratasys-Objet merger integration completed, it is now focusing on aligning additional functional areas within the company, including R&D and operations.
The strong organic growth in hardware and system revenue was a result of broad-based demand across its entire product line, including the Production Series, Design Series, and Idea Series of 3D printers. The demand for manufacturing in high-end prototyping applications continues to drive this growth.
Consumables revenue growth continues to be driven by acceleration in customer usage, its growing installed base of systems, and Stratasys' efforts surrounding application training and materials education.
In Q4, due to a relatively higher consumable utilization rate, Stratasys demonstrated strong sales of its Production and Design Series systems. It is believed that the continued strength in the Production and Design Series system sales are positive indicators of consumables revenue growth in the future.
Stratasys' growth in service revenue was driven by increased revenue from maintenance contracts and service parts, reflecting its growing base of installed systems. Also, the increasing demand for large and complex production parts, as well as the ongoing development of the RedEye sales channel, resulted in 22% revenue increase for Q4 over last year. The inclusion of MakerBot products significantly increased shipped units to 10,963 units in the last quarter as compared to 1,136 units shipped in Q4 2012.
Stratasys' gross margin percentage improved from 57.8% in Q4 2012 to 60.2% in Q4 2013. This is quite impressive considering the impact of MakerBot, even though MakerBot inherently maintains lower margins. Stratasys is boosting its investment on increasing the headcount to support its growth plans, higher commission expenses due to increased sales, and incremental sales, marketing and infrastructure investments.
Also, Stratasys' significant cash balance, combined with the availability of $253 million revolving credit facility, provides it flexibility to fund internal growth plans as well as future M&A projects and investments.
Focus on innovation
Stratasys seeks to maintain its leadership in the prototyping market by expanding the functionality and affordability of its products. It is looking to expand the direct digital manufacturing business by building on proven opportunities, as well as developing exciting new applications and technologies. Stratasys is looking at introducing new niche vertical applications in the education and dental markets, and seeks to accelerate new solutions to the market with an unmatched commitment to product development and innovation.
The focus on innovation, which is critical to its success, is visible in Stratasys' strong commitment to technology and development and its industry-leading investment in R&D. This commitment has resulted in several new product introductions recently that should help build or improve on opportunities as well as drive expansion into new applications.
Stratasys is seeing positive momentum, driven by the ongoing demand for its industry-leading products and services. Recent new product introductions and channel initiatives will greatly improve 3D printing accessibility and drive expanded usage for its products. Moreover, many new internal projects will further Stratasys' objective of market leadership and long-term growth as it continues to evaluate additional acquisitions and opportunities to accelerate growth.
Better than 3D Systems?
Stratasys has been doing better than its primary rival, 3D Systems. Unlike 3D Systems, Stratasys enhanced its gross margin in the latest reported quarter and beat the analyst estimate on both revenue and earnings.
Also, Stratasys has been more sensible about acquisitions which will help it perform better than 3D Systems in the long run. 3D Systems has acquired nearly 45 companies in the last two years and in my opinion, it is impossible to integrate each of the M&A into its core business successfully. 3D Systems is shooting itself in the foot and will lose a lot of money if the acquisitions fail.
Stratasys, on the other hand, has integrated its M&A quite impressively. The company's acquisition of MakerBot has panned out nicely as it contributed over 16% to its revenue. The low cost of MakerBot's Digitizer has helped Stratasys to perform better than 3D Systems in the consumer segment and the company is looking to build up on its success. Stratasys recently announced the order availability for MakerBot's largest 3D printer called the MakerBot® Replicator® Z18 3D Printer. In addition, Stratasys will also start shipping for the new fifth generation MakerBot Replicator Desktop 3D Printer. Bre Pettis, Stratasys' chief executive, said:
"We believe the MakerBot Replicator Z18 is a game-changer in the world of 3D printers. We consider its massive build volume and its ability to bring professional-quality 3D printing to the user comparable to industrial 3D printers that are tens of thousands of dollars more. We view it as the 3D printer for large industrial models, engine prototypes, movie special effect models and the next generation spacecraft. We are using it in our own factory to make prototypes, jigs and fixtures. This 3D printer is very exciting for us and has already generated a lot of excitement in the industrial 3D printing community."
Valuation and conclusion
At a forward P/E ratio of 38, Stratasys is cheaper than 3D Systems which has a forward P/E ratio of almost 50. Moreover, over the next five years, both companies' earnings are expected to grow at a CAGR of around 20%, which makes Stratasys a more sensible buy to benefit from 3D printing's growth. So, investors looking to make the most of the 3D printing industry should definitely take a look at Stratasys for the long haul.
