John. >> david do the margins improve on the new equipment? << I do not have any information to answer that question reliably. I believe there are manufacturing and volume inefficiencies in the early phase of a new product and this puts downward pressure on gross margins. After reviewing Stratasys' press release and the subsequent comments of analysts, I think the more relevant issue when looking at their overall gross margins is not cost pressure but sales price pressure.
An analyst commented today about an issue I refer to as line canibalization and a possible trail off in demand for SSYS's FDM 1650 and 2000 modelers. In order to keep the flow of orders going SSYS might be inclined to lower sales prices to induce sales, and of course, this impacts gross margins.
According to SSYS's 10K and analysts reports, the new 8000 modeler has a list price of $200,000. At the company's annual meeting I thought I heard the sales price for the 8000 modeler was going to be around $300,000. (Big difference and big impact on gross margins!)
If I was a customer and had a choice between the FDM 2000 at $150K or a FDM 8000 at $200K then I would probably purchase the 8000 modeler. I wouldn't want to someday tell my frowning boss that we can't build bigger models because we decided to save $50K (33%) on the purchase price. Now if the price of the 8000 modeler is $300K then that changes the cost/benefit comparison to the FDM 2000 machine by a considerable amount.
If I was running Stratasys I would initially try to push the 8000 modeler out the door closer to a $300K price. Why? Because I'm the only game in town with this type of modeler and my target market is the cash rich automotive and aerospace companies. (More importantly the 8000 modeler has the features to support this price.) But I wouldn't push the price envelope above $300K since there are alternative modelers from 3D Systems and DTM Corporation. So let's anchor the price of the 8000 machine at $300K and cut deals from this price to keep the orders flowing. The risk is that if customers balk at a $300K sales price then I have to go back to them with a lower price after a 'cooling off' period. This could extend the time to close a sale but the upside to gross margins and income warrants targeting the 8000 at $300K.
I suspect that given the newness of the 8000 modeler and the higher purchase price, many potential customers need additional time to evaluate the machine, leading to Stratasys' statement of sales pushouts into subsequent quarters. Once the large automotive and aerospace companies decide to buy the modeler it can also take considerable time to requisition funds and cut a purchase order.
Imagine with the level of R&D at Stratasys what the bottom line would look like if gross margins were not 60%-66%? It would be ugly! Watch the gross margins and watch competitive invasions like 3D Systems new Actua modeler. These gross margins will come under pressure when someone presents a real competitive product to the Stratasys line. For now there is no competitive impedus for Stratasys to lower sales prices other than to occasionally boost order flow and clinch a tough sale. ESPECIALLY, watch out for someone invading SSYS's high margin consumables business. IMHO, this SSYS's most vulnerable area and it's up to them to be a "good monopoly" by systematically cutting the price of consumables after demand increases x%. Otherwise someone will have an easy opportunity to invade this business. Wasn't this a hard lesson learned by 3D Systems? Wasn't it the Dynamite Cartel in the early 1900's that taught us this strategy? OK, a more recent master of this approach is 3M Company.
- David. |
