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Shares of Stratasys (SSYS - Free Report) soared 14.94% on Thursday’s trade after the company reported better-than-expected second-quarter 2014 results. Reported earnings and revenues also compared favorably on a year-over-year basis.

 

Quarter Details

Stratasys’ non-GAAP revenues increased 67.6% from the year-ago quarter to $178.5 million and surpassed the Zacks Consensus Estimate of $156 million. MakerBot’s revenues were $33.6 million in the quarter. 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. The company also witnessed higher sales for its desktop 3D printers.

In the reported quarter, Product revenues on a non-GAAP basis were up 70.4% from the year-ago quarter to $154.1 million on the back of higher systems sales and demand for consumables. Apart from this, non-GAAP Services revenues increased 49.8% from the year-ago quarter to $24.4 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 14,909 units of 3D printers and other additive manufacturing systems compared with 1,261 units sold in the year-ago quarter primarily due to higher demand for MakerBot products and increased sales of higher-end Fortus and Connex systems. The company also witnessed strong demand for entry-level Mojo and uPrint 3D printers.

Stratasys’ adjusted gross margins (excluding amortization and other one-time expenses and including share-based compensation) increased 73 basis points (bps) primarily due to higher revenue base and favorable business mix.

The company’s adjusted operating expenses increased 80.7% year over year to $83.4 million. Moreover, as a percentage of revenues, operating expenses increased 338 bps year over year. The increase was primarily due to the MakerBot acquisition and investments in sales, marketing and research related to product innovations.

This increase in operating expenses impacted operating margins, which contracted 267 bps. Nonetheless, in dollar terms, Stratasys’ operating income was up 38.1% year over year. The company reported adjusted net income (excluding one-time items but including non-cash stock-based compensation expenses calculated on proportionate tax basis) of $22.2 million compared with $13.7 million reported in the year-ago quarter.

The company exited the quarter with cash and cash equivalents of $502.3 million compared with $407.2 million in the previous quarter. Inventories for the quarter stood at $114.3 million compared with $99.8 million reported in the previous quarter. The company does not have any long-term debt.

Guidance

The company revised its fiscal 2014 guidance. For fiscal 2014, the company expects its revenues to range within $750–$770 million (previous guidance $660–$680 million) while the Zacks Consensus Estimate is pegged at $689 million. Management now expects non-GAAP earnings in the range of $2.25–$2.35 up from $2.15 to $2.25 higher than the Zacks Consensus Estimate of $1.75 per share.

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 for increasing its manufacturing capacity to cater to the increasing demand for 3D solutions and printers.

Stratasys also updated its long-term operational targets, which includes a 25% organic revenue growth (previous forecast 20% growth). The company expects its operating margins to range between 18% and 23%, down from 20% to 25%, due to higher investments. Nonetheless, Stratasys maintained its net margin forecast of 16% to 21%.

Conclusion

Stratasys not only reported better-than-expected second-quarter results but also increased its fiscal 2014 guidance.  

Despite the significant rise in the operating expenses affecting margins, these investments are expected to benefit Stratasys in 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 3D Systems Corp. (DDD - Free Report) and Voxeljet (VJET - Free Report) .

Stratasys has a Zacks Rank #3 (Hold).

Investors may also consider F5 Networks (FFIV - Free Report) , which sports a Zacks Rank #1 (Strong Buy).



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