3D printing solutions provider Stratasys (SSYS) reported third-quarter 2014 adjusted earnings (excluding amortization, impairment and other one-time items but including stock-based compensation) of 49 cents which beat the Zacks Consensus Estimate of 45 cents.
Nonetheless, shares slumped 10.8% on yesterday’s trade after the company revised down the fiscal 2014 earnings outlook.
Quarter Details
Stratasys’ non-GAAP revenues soared 61.5% from the year-ago quarter to $203.6 million and surpassed the Zacks Consensus Estimate of $196 million. The company witnessed improvement in the revenues of both Products and Services segments, which resulted from robust demand for its higher-margin products and services.
In the reported quarter, Product revenues on a non-GAAP basis were up 48.5% from the year-ago quarter to $160.2 million on the back of higher system sales and demand for consumables. Apart from this, non-GAAP Services revenues surged 144.7% from the year-ago quarter to $43.4 million, attributable to an increase in revenues from maintenance contracts and services, which reflects Stratasys’ expanding installed systems base.
During the quarter, the company shipped 10,965 units of 3D printers and other additive manufacturing systems compared with 5,925 units sold in the year-ago quarter. The growth was primarily because of higher demand for MakerBot products and increased sales of higher-end Fortus and PolyJet systems.
Stratasys’ adjusted gross margins (excluding amortization and other one-time expenses and including share-based compensation) contracted 44 basis points (bps) primarily due to acquisitions.
The company’s adjusted operating expenses increased 62.2% year over year to $87.8 million. Moreover, as a percentage of revenues, operating expenses increased 18 bps year over year. The increase was primarily due to the Solid Concepts, Harvest Technologies and MakerBot acquisitions and investments in sales, marketing and research related to product innovations.
This increase in operating expenses impacted operating margins, which contracted 62 bps. Nonetheless, in dollar terms, Stratasys’ adjusted operating income was up 54.9% year over year.
The company reported adjusted net income (excluding one-time items but including non-cash stock-based compensation expenses calculated on a proportionate tax basis) of $24.5 million compared with $13.8 million reported in the year-ago quarter.
The company exited the quarter with cash and cash equivalents of $383.5 million compared with $502.3 million in the previous quarter. Inventories for the quarter stood at $119.3 million as against $114.3 million reported in the previous quarter. The company does not have any long-term debt.
Guidance
Stratasys revised the fiscal 2014 earnings guidance. Management expects non-GAAP earnings in the range of $2.21–$2.31 down from $2.25 to $2.35 primarily due to the GrabCAD acquisition. The Zacks Consensus Estimate of $1.85 per share.
Nevertheless, the company reiterated its fiscal 2014 revenue guidance of $750–$770 million. The Zacks Consensus Estimate is pegged at $763 million.
Management expects operating expenses related to sales & marketing and research & development to increase in 2014 to supplement the growing demand for Stratasys’ solutions. These are expected to impact operating margins in the year. Also, the company expects to incur capital expenditures within $50 to $60 million for increasing its manufacturing capacity to cater to the higher demand for 3D solutions and printers.
Conclusion
Stratasys not only reported better-than-expected third-quarter results but also reiterated the fiscal 2014 revenue guidance. However, owing to its acquisition strategy the company cut the fiscal 2014 earnings forecast.
Despite the significant rise in the operating expenses affecting margins, these investments are expected to benefit Stratasys over the long run. The company has resorted to strategic acquisitions to enrich its offerings. The company’s recent acquisitions of Solid Concepts and Harvest Technologies are expected to incrementally benefit its top line, going forward.
However, the company expects expenses to rise further in fiscal 2014 for product enhancements and capacity increases to address growth opportunities. Although these investments are expected to impact margins in the short run, product launches and global expansion will help the company generate incremental sales over the long haul.
Nevertheless, Stratasys is concerned about its high-cost business model and competition from big and small players like Hewlett-Packard (HPQ), 3D Systems Corp. (DDD) and Voxeljet (VJET).
Stratasys has a Zacks Rank #3 (Hold).
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