Stratasys Ltd. (SSYS) is a company that provides rapid prototyping (RP), manufacturing systems and 3D printers for several equipment manufacturers. Its systems are used in direct digital manufacturing (DDM) and rapid tooling applications, allowing engineers and designers to create precise physical models, tools and 3D prototypes from computer-aided designed models (CAD) through the use of patented Fused Deposition Modeling (FDM) and PolyJet rapid prototyping processes. The company reports revenue from basically two important segments: Product Revenues and Services Revenues. The Product segment includes the sale of products and consumables and accounted for 86.0% of total revenue in fiscal 2013, while the Services segment, which includes revenues from service offerings such as installation and maintenance, reported 14.0%.
Stratasys provides customers the possibility of developing highly complex geometrical designs using diverse materials with in-office rapid prototyping systems, irrespective of chemical post-processing or facility modification. Still, the market for these new solutions is yet undeveloped, with a strong presence of conventional model-making and prototyping methods. Moreover, peers such as 3D Systems Corp., (DDD), EOS GmbH, EnvisionTEC GmbH, Delta Micro Factory Corp. (PP3DP), Affinia Group Inc., Ultimaker, Printrbot, LeapFrog Enterprises Inc. (LF), and Solidoodle. Despite the competition, Stratasys reported encouraging fourth-quarter results with over-estimated sales.
Stratasys is leader in rapid prototyping machines, with innovative technology such as spool-based system, which can be used in an office environment, and products such as the RedEye RPM, an online extension of the company's BuildFDM service, currently the world's largest RP and part-building service. Moreover, the company is dedicated to improve the quality of its products, adopting the ISO 9001: 2008 certification, focused on product quality.
The firm has a huge installed base of 3D printing systems. Stratasys developed the fused deposition modeling (FDM), a technology that enables the production of models built off of a 3D CAD design, by heating up composite material and melting thin layers of the material. Through this technology engineers have the capability to perform function, fit and visual verification tests in-house, reducing costs and shortening the product cycle. The materials, mainly plastics, with which the company’s printers work, cannot be replaced by other types of materials; related consumables are proprietary of Stratasys. Therefore, when a customer buys a printer, they cannot use other supplies than those sold by the company. During 2013, the company has perceived a considerable increase in consumable revenues, which climbed 156.0%. With higher customer usage and an increased installed base, consumable revenues are expected to increase.
It has been recently stated by Management that Stratasys will engage in mergers and acquisitions to tap growth opportunities. Previous aquisitions by the company are Solidscape Inc. for $38 million in 2011, Objet Ltd., and during 2013, MakerBot Industries LLC. The acquisition of MakerBot expanded Stratasys' customer base and helped it target engineers, designers, architects and entrepreneurs, and the company continues with the integration of Objet Ltd., which is likely to strengthen its product portfolio. Recently it announced entering into definitive agreements to acquire two privately held companies, Solid Concepts Inc. and Harvest Technologies.
Solid Concepts and Harvest Technologies are leading providers of additive manufacturing services. Each of these companies has interesting customers, and Stratasys CEO David Reis said that the company would combine the businesses with its RedEye service bureau strengthening Stratasys’ direct digital manufacturing and parts production expertise, and added: “These transactions are consistent with our core strategic imperatives and M&A strategy, which is focused on acquiring leading companies to support our goal of continued leadership in the segments in which we operate, as well as reaching new niche verticals.”
The transaction is likely to create a leading strategic platform, to meet a broad range of customers’ needs, and also provide Stratasys the opportunity to leverage manufacturing services capabilities.
Stratasys works an industry with high customer switching costs and meaningful barriers to entry to developing a competitive product. Printer sales and aftermarket consumable materials are the two major streams of revenue for these companies. However, the uncertainty of demand levels and rapidly changing product cycle introduces some risks as to sustained growth levels. Economic uncertainty affects volumes, and the company’s sales in Europe add some risks, as it exposes the company to considerable foreign currency fluctuations. Moreover, this industry sees rapid and substantial innovation and technological change, which forces companies to upgrade or develop systems or materials to cope with technological changes.
Stratasys reported fourth-quarter adjusted earnings of $0.39, a bit under the estimated $0.41. However, revenues increased 61.6% from the year-ago quarter to $155.8 million, on improvement in both the Products and Services segments. Analysts think the Objet acquisition will make Stratasys the largest manufacturer of 3-D printing equipment for the professional market, and Markerbot will add bargaining and pricing power to the company. Nevertheless, these acquisitions came at a significant cost, giving the company a hard time growing GAAP EPS into 2013 given the lower margin business and acquisition-related amortizations coming. More bearish analysts think the acquisitions might end up cannibalizing customers’ bases and hurting prices. Still, these innovations and acquisitions are still to show results in the near term.
Disclosure: Damian Illia holds no position in any of the stocks mentioned.