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Stratasys: Flat Outlook Offsets Strong Profits

David Silver, CFA, CPA

We reduced our fair value estimate for no-moat Stratasys (SSYS) to $21 from $22. The company reported improved fourth-quarter results but issued cautious 2017 guidance including flattish revenue. Our fair value estimate thus reflects an improving product mix, expense control, and cash flow balanced by continued weakness in the market for 3D printing products and services, including customer hesitancy due to looming new product launches from competitors including H-P and Carbon 3D.

Fourth-quarter adjusted EPS of $0.15 (versus a loss of $0.01 one year ago) excludes numerous non-GAAP adjustments totaling $22.6 million after-tax, or $0.45 per diluted share. Slightly higher sales were aided by stronger gross margins (a richer product mix) and lower selling, general, and administrative expenses. Adjusted operating income of $11.6 million rose more than $20 million over an adjusted operating loss in the prior year.

Management established 2017 guidance ranges for revenue of $645 million-$680 million and adjusted net income of $10 million-$20 million (excluding roughly $63 million after-tax in mainly non-cash adjustments). We modestly raised our forecast 2017 gross margins, which is largely offset by less favorable tax treatment. Gross margins benefited from initial sales of the company’s high-end J750 multi-color, multi-material printers.

Quarterly results contained signs of stability, if not a rebound to notable growth. Fourth-quarter revenue rose 1% year over year to $175 million and rose 12% sequentially. Products sales rose 2% to $127 million, while Service revenue fell 1% to $49 million. Within Services, year-over-year sales of high-margin consumables rose 11%, and customer support revenue rose 8%.

Importantly, the company continues to develop new products, including higher-performance materials for both its FDM and Polyjet printers. It remains pleased with initial demand for its new J750 printer, its most significant new product introduction.

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