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Morningstar | Stratasys Starts 2019 in the Right Direction, but With Many Unanswered Questions; Maintaining FVE

No-moat Stratasys started 2019 with first-quarter results mostly in line with our full year expectations. Our fair value estimate remains at $20 after we added first quarter results to our model and made slight adjustments to 2019 product segment gross margins. Despite new product launches and strength in North American markets, Stratasys still turned in low-single-digit top-line revenue growth in its products and services segments. That said, gross margins surprised to the upside for products and service segment gross margins disappointed. Stratasys now has five consecutive quarters with gross margins near or above 55%, so we chose to raise product gross margins 100 basis points to 55%. We didn’t have enough evidence to diverge from our service gross margin forecast of 35%.

Even with Stratasys beginning its roll-out of new printers, like the F120 industrial grade platform for new 3D printing customers and the V650 printer large-scale commercial platform, we are waiting for new product launches to transition from client interest to client order growth before adjusting our long-term forecasts. Management reaffirmed guidance for full-year 2019, with top-line revenue between $670 and $700 million and a GAAP net loss of $22 to $12. Adjusted for higher gross margins in the product segment, our GAAP net loss forecast of $16 million, for 2019,  falls in the middle of management’s target range. We assume top-line revenue eclipses $677 million in 2019.

Management mostly attributed top-line growth to strength in North American markets and described Asian demand as slower. Adjusted for its Solidscape divestment in 2018, product and system revenue improved 4% against the first quarter last year. Consumables revenue increased 3% over the last 12 months, while services and customer support only rose 1% and 2%, respectively. Reportedly, high-end FDM systems and F123 platforms drove North American decent growth in the March quarter.

Stratasys’ search for a long-term CEO following Ilan Levin’s abrupt departure now spills into the second quarter. Management offered few details on the status of its search, only noting that its pool of candidates was limited due to the relatively young industry.