Schafer: Long-term strategy punishes Stratasys
Article by: LEE SCHAFER , Star Tribune Updated: February 7, 2015 - 4:52 PM
It’s not every day that a bunch of top securities analysts find themselves asking basically the same question
over and over on a conference call, as they did last week with the 3-D printing company Stratasys.
One after another got on the phone to ask some version of “why.” That is, why will the Eden Prairie company
spend so much more money than we thought it would, this year and next?
It wasn’t just that they didn’t like the answer. It sounded, instead, like these analysts couldn’t quite get over
just how wrong they now looked with the new — and much lower — earnings outlook of the company.
The irony is that seeing the “why” didn’t take all that much analytical skill. It’s a case of corporate leaders
deciding to invest more in the business to make sure they get their share of a fabulous long-term growth
opportunity.
How fabulous? The latest industry forecast is that the 3-D printing technology market will exceed $21 billion
by 2020, up from an estimated $3 billion in 2013.
What should be puzzling to the analysts is when executives put that kind of growth potential at risk just to hit
some short-term earnings target.
Within minutes of concluding their call, however, the leaders of Stratasys also saw their company’s stock
lose about a third of its value. It can be painful to invest in the long term.
Stratasys had been one of the region’s recent highfliers. It got its start here as a maker of what was called a
rapid prototyping machine. After the late 2012 merger of Stratasys and Objet Ltd. of Israel, the new Stratasys
Ltd. emerged as a leader in the suddenly very hot industry now called 3-D printing.
People in the industry are more likely to call it “additive manufacturing” rather than 3-D printing, because it’s
a manufacturing approach, not any sort of printing on paper. The traditional process for building a part — call
it subtractive manufacturing — starts with a block of material and shaves it back until the part is ready, sort of
like a sculptor working on a block of granite with a chisel.
As it sounds, in additive manufacturing a part is “built” by adding material in very thin layers, and that can
save a lot of time and expense.
As the technology kept improving, engineers found more and more uses for it. When Goldman, Sachs & Co.
initiated research coverage of Stratasys and a competitor last year, Goldman’s analysts were talking about
an industry getting more than 10 times bigger in just 15 or 20 years.
Forget the talk about hobbyists producing some gadget on these 3-D printers. The big money to be made
will come from selling equipment and supplies to big companies in big industries, like automotive and
aerospace, helping them build parts throughout their supply chains.
Last spring, Goldman Sachs called Stratasys the “best-positioned” company in an industry that one day
reaches maybe $40 billion in total sales. And fast-growing Stratasys had then just completed a quarter of
only about $150 million in revenue.
As CEO David Reis dryly pointed out last week, if additive manufacturing were more like a traditional
industry, “with growth rates ranging from 3 percent to 5 percent year over year,” then figuring out precisely
how much to spend on marketing or developing new product applications would be a whole lot easier.
The additional operating expense, for sales and marketing staff and systems along with product
development and other items, does punish earnings in the short term. It’s most of the explanation for
why adjusted earnings per share expectations came down last week from around $2.95 for the year
to around $2.15.
The operating expense outlook for this year and next wasn’t the only unhappy surprise for investors.
The fourth quarter turned out to be a challenging one for the company’s MakerBot unit, a producer of
consumer-oriented machines that was acquired in 2013.
One outcome is that Statasys has elected to write down its goodwill related to the MakerBot acquisition
by at least $100 million.
One of the analysts wanted assurances from management that something like the additional warranty
costs for fixing a poorly performing component of MakerBot’s new machine, one of the problems that
cropped up in the fourth quarter, won’t happen again.
And here you have to congratulate Reis for his patience.
“Unfortunately, we came out with three new products at a very small company, which was growing at …
600 percent in the last two years, and here we missed,” he said. “And can I guarantee that it’s not going
to happen again in a very innovative … and fast-moving company? The answer is no.”
Even with the additional expenses and short-term setback with MakerBot, the company didn’t back off
long-term financial goals. Down the road, when the business and market mature a little, the company
wants to be able to post annual revenue growth, not including acquisitions, of at least 25 percent per
year. It’s shooting for an operating margin, adjusted for certain costs, of between 18 percent and 23
percent.
So what the analysts wanted to know was when that dream would be realized. If not now, when?
That had Reis trying, once again, to explain to financial analysts that running a company in a high-tech
industry growing from $3 billion to $21 billion or even $40 billion in size isn’t the same thing as running
an electric utility.
“I said it two times. I will say it again,” Reis explained, when deep into the question-and-answer chat with
the analysts. “The market that we operate in, additive manufacturing, is evolving very, very fast.”
And he kept saying that’s a good thing. New opportunities come up daily. But no, he can’t name the quarter
the long-term goal of at least 25 percent annual revenue growth with maybe 20 percent adjusted operating
margins is reached.
If it ever happens, though, investors who hung on in February 2015 will be very well rewarded for their
patience.
lee.schafer@startribune.com • 612-673-4302
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