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Stratasys, Inc. Solid ThirdQuarter Results; New Products Continue to Drive Growth

Stratasys reported third‐quarter earnings that were ahead of consensus ($0.40 versus consensus of $0.36). During the quarter, Stratasys shipped $3.1 million of finished goods to two new distribution centers the company built in Europe and Asia, which added about $0.02 to EPS in the third quarter (due to favorable impact on gross margin). The new distribution centers were built in anticipation of growing demand due to the pending merger with Objet (currently all orders are shipped out of the company’s distribution center in Minnesota). Excluding the benefit to gross margin from building inventory and related absorption of overhead, adjusted EPS for the quarter would have been $0.38.

The stock was down about 10% on the day of the release, puzzling many investors given the apparently solid third‐quarter result. We believe the pullback is largely a function of high expectations leading up to the release, as the stock had increased from $54 at the beginning of October to $68 as of Thursday’s close. Other reasons for Friday’s softness may include: 1) the guidance for the fourth quarter was essentially unchanged, as the $0.04 raise (midpoint increased from $1.34 to $1.39) only accounts for $0.04 of outperformance in the third quarter; 2) performance of legacy low‐end 3‐D printer unit products is unclear (i.e., 3‐D printer unit growth excluding the new Mojo printer was not disclosed); and 3) Fortus printer unit sales were about flat on a sequential basis (strength in the Fortus printer category has been the main contributor to growth at Stratasys since the end of 2010).

Management remains excited about the combination with Objet, and is optimistic the company can address any concerns the Committee on Foreign Investment in the United States (CFIUS) has before the end of the 45‐day review period that expires on November 30, 2012. Management believes the merger will be completed sometime during the fourth quarter.

Guidance Management revised fiscal 2012 revenue guidance upward, with revenue now forecast to fall within a range of $194 million to $199 million (previously $193 million to $198 million). Consensus expectations for fiscal 2012 (at the time of the release) were $194 million. Adjusted EPS guidance was raised to a range of $1.37 to $1.40 (previously $1.31 to $1.38). Consensus expectations for fiscal 2012 (at the time of the release) were $1.34. Adjusted EPS exclude $0.52 to $0.60 of nonrecurring items related to employee stock option expense, amortization of intangibles related to the company’s acquisition of
Solidscape, and Objet‐related transaction expense.

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