Modest 2Q for Stratasys

Zacks

Stratasys Inc. (SSYS) reported second quarter 2012 earnings per share of 32 cents, beating the Zacks Consensus Estimate of 24 cents.

Revenue

Stratasys recorded total revenue of $49.4 million in the second quarter, up 31.0% from $37.8 million in the year-ago quarter. The quarter’s revenue was particularly driven by the 126% year-on-year spike in sales of the company’s higher margin Fortus 3D production systems. Consumable revenue jumped 34% year-over-year, which was also boosted by the strong performance of Fortus.

Incremental use of direct digital manufacturing applications, which provides comparatively higher utilization rate, continued to help the consumable segment’s revenue.

Looking at the segments, Products revenue came in at $41.4 million, up 35.2% from $30.7 million reported in the year-ago quarter. Services revenue jumped 11.8% to $7.96 million from $7.13 million in the year-ago quarter.

Operating Results

Gross profit stood at $26.2 million (52.9% of the total revenue) in the quarter, up 32.6% from $19.7 million (52.2% of the total revenue) in the year-ago quarter. The gross margin improvement was due to efficient cost reduction measures.

Operating income in the quarter was $5.8 million versus $6.1 million in the second quarter of 2011. However, operating expense increased 49.3% year over year, primarily due to higher R&D and SG&A expenses. Operating margin of 11.7% dropped from 16.1% in the year-ago quarter. The company is offering lower-margin products, which has resulted in the reduction of margin.

The company reported net income of $3.02 million or 14 cents per share in the second quarter compared with $3.99 million or 18 cents per share in the prior-year quarter. Non-GAAP net income was $7.0 million or 32 cents per share in the reported quarter.

Balance Sheet

The company exited the quarter with cash and cash equivalents of $51.2 million, up from $24.4 million in the previous quarter. The company does not have any long-term debt.

Guidance

The company revised its guidance for fiscal 2012. Revenues are now expected in the range of $193.0 million to $198.0 million, versus previous guidance of $183.0 million to $193.0 million.

Non-GAAP earnings are projected to be between $1.31 and $1.38 per share, versus previous guidance of $1.29 to $1.38 per share. The company expects GAAP earnings between 83 cents and 98 cents per share, versus previous GAAP guidance of 97 cents to $1.13 per share.

Zacks Estimates for third quarter and fiscal 2012 was 43 cents and $1.72 respectively.

Conclusion

The second quarter results were encouraging with EPS exceeding the Zacks Consensus Estimate and revenues improving on a year-over-year basis. Moreover, the revenue growth in the Fortus 3D production systems helped revenue grow substantially.

Moreover, the company recently disclosed that, HP has agreed to discontinue their manufacturing and distribution agreement for 3D printers, effective at the end of 2012. Stratasys does not expect the contract termination to have a material impact on the business fundamental of the company.

However, we are a bit apprehensive about the company’s high-cost business model and stiff competition from big and small players like 3D Systems Corp. (DDD). Nonetheless, the acquisition of Objet is expected to improve the growth of 3D systems business.

The company has a Zacks #3 Rank, which implies a short-term Hold rating on the stock.

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