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Stratasys Ltd (SSYS - Analyst Report) reported fourth-quarter adjusted earnings of 39 cents, which lagged the Zacks Consensus Estimate of 41 cents.

However, including stock-based compensation but excluding amortization expenses, merger expenses performance bonus and other one-time items and calculated on a proportionate tax basis, the company’s earnings came in at 41 cents per share up from 20 cents reported in the year-ago quarter.

Quarter Details

Stratasys’ non-GAAP revenues increased 61.6% from the year-ago quarter to $155.8 million and surpassed the Zacks Consensus Estimate of $150 million. MakerBot’s revenues were $24.9 million for the quarter. The company witnessed improvement in the revenues of both Products and Services segments, which resulted from higher demand, and various team integration and cross-selling activities.

In the reported quarter, Product revenues grew 66.1% from the year-ago quarter to $135.6 million on higher systems sales and demand for consumables. Apart from this, Services revenues increased 36.9% on a year-over-year basis to $20.1 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 10,963 units of 3D printers and other additive manufacturing systems compared to 1,136 units sold in the year-ago quarter, primarily due to the MakerBot acquisition.

Stratasys’ adjusted gross margins (excluding amortization and other one-time expenses and including share-based compensation) increased 255 basis points (bps) primarily due to higher revenue base and favorable business mix. Although the company reported 86 bps contraction in operating expenses as a percentage of revenues, its operating expenses increased 58.5% on dollar terms. The increase was primarily due to the MakerBot acquisition and investments in new projects. Moreover, higher commission expenses and higher headcount led to higher operating expenses.

The company’s adjusted operating margins expanded 341 bps to 15.3% due to operational efficiencies. The company reported net income (excluding one-time items but including non-cash stock-based compensation expenses and its related tax impact) of $20.2 million or 41 cents compared to $10.3 million or 20 cents reported in the year-ago quarter.

The company exited the quarter with cash and cash equivalents of $414.1 million compared to $414.9 million in the previous quarter. Inventories for the quarter stood at $88.4 million compared to $79.8 million reported in the previous quarter. The company does not have any long-term debt.

Guidance

For fiscal 2014, the company expects its revenues to range between $660 million and $680 million while the Zacks Consensus Estimate is pegged at $672 million. Non-GAAP earnings are anticipated in the range of $2.15 to $2.25 per share, higher than the Zacks Consensus Estimate of $1.76.

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 2014. Also, the company expects to incur capital expenditures in the range of $50 to $70 million on increasing its manufacturing capacity to cater to the increasing demand for 3D systems and printers.

Apart from the fiscal year estimates, Stratasys also outlined its long-term growth projections. The company expects revenues to grow 20% and above rate while non-GAAP operating margins are expected in the range of 20% to 25% of sales. Moreover, management expects non-GAAP net income margin in the range of 16% to 21% at an average tax rate of 15% to 20%.

Conclusion

Stratasys reported encouraging fourth-quarter results with better-than-expected sales on the back of solid performances from Product and Services segments. Moreover, the company provided a favorable guidance.

However, the company expects expenses to rise 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 to generate incremental sales over the long term.

Nevertheless, Stratasys is concerned about its high-cost business model and competition from big and small players like 3D Systems Corp. (DDD - Analyst Report). However, the acquisition of MakerBot is expected to aid its 3D systems business growth.

The company has a Zacks Rank #5 (Strong Sell). Investors may also consider other companies such as Lexmark International (LXK - Analyst Report) and Quantum Corporation (QTM - Snapshot Report). Both the stocks sport a Zacks Rank #1 (Strong Buy).

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