Stratasys has released their US tax Form 20-F and in it there is a wealth of information about the company’s operations.
Form 20-F is actually the “Annual Report for Foreign Private Issuers”. It’s the important form as Stratasys is actually an Israeli company after the merger/acquisition with Objet in 2012. As such, the company operates under Israeli law and does business in many other countries, including the USA, which requires this particular informational statement to be published.
First, the basics.
In 2016, it seems that Stratasys again did not make a profit, posting a loss of USD$77M. If that seems like a lot, and it is, it pales in comparison to their 2015 loss of USD$1.4B (yes, that’s a “B”). They’ve very significantly plugged the holes that were leaking cash and brought the company 94% of the way to breaking even.
How did they achieve this feat? They explain:
During the years 2015 and 2016, the growth rate in the 3D printing and additive manufacturing industries slowed significantly and our revenues declined in each year relative to the previous year. We experienced lower revenues across most regions and most product and service lines. We believe this trend was attributable, in part, to weak investment in capital equipment by customers within key verticals, as well as difficult macroeconomic conditions in certain global regions. These factors, when combined with excess capacity that we have experienced as a result of our significant growth in the years 2013 and 2014, adversely impacted our profitability. While we were able to mitigate this trend via cost reduction measures in 2016 and thereby improve our operating results relative to 2015.
I believe this is being well received by investors, and there is even an analysis suggesting that Stratasys is about to hit a turnaround, based on a mathematical analysis of Stratasys’ stock price trends.
After the basics, there is much inside the rather long document (it’s over 100,000 words in length!) I’ve skimmed through it and picked out some notable passages, particularly where they explain the risks to the business:
We may be subject to claims that our 3D printers have been, or may be, used to create parts that are not in compliance with legal requirements or that intellectual property posted by third parties on our Thingiverse and GrabCAD websites infringes the intellectual property rights of others.
Ah, the pleasures of operating sites where the public can post anything they want. While the community values the ability to do so, it’s important to recognize there are risks undertaken by the company sponsoring the activity.
The sale of end use parts in general, and to customers in the foregoing industries [aerospace, medical and automotive] in particular, exposes us to possible claims for property damage and personal injury or death, which may result from the use of these end-use parts.
This is a scenario speculated on for years and now Stratasys is officially recognizing that it might actually occur. I think as the company moves deeper into production part production, this may indeed happen sooner or later.
We rely on a sole supplier, Ricoh Printing Systems America, Inc., or Ricoh, for the printer heads for our PolyJet 3D printers. Under the terms of our agreement with Ricoh, we purchase printer heads and associated electronic components, and receive a non-transferable, non-exclusive right to assemble, use and sell these purchased products under Ricoh’s patent rights and trade secrets.
Really? One supplier? That is indeed a risk, should Ricoh have problems. I’m not aware they are, but having a second supplier for any key component could become very important.
We are currently subject to a number of lawsuits. These and any future lawsuits to which we become subject may have a significant adverse effect on our financial condition or profitability.The lawsuits allege violations of the Exchange Act in connection with allegedly false and misleading statements concerning our business and prospects. - and - We intend to mount vigorous defenses to these lawsuits.
These are no doubt as a result of expectations raised when MakerBot was acquired, and while the entire desktop 3D printer market crashed and brought down with it interest in 3D printing in general, Stratasys was certainly not the only company affected.
If we are unable to obtain patent protection for our products or otherwise protect our intellectual property rights, our business could suffer. Despite our efforts to protect our proprietary rights, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies, inventions, processes or improvements. We cannot assure you that any of our existing or future patents or other intellectual property rights will not be challenged, invalidated or circumvented, or will otherwise provide us with meaningful protection. Our pending patent applications may not be granted, and we may not be able to obtain foreign patents or pending applications corresponding to our U.S. patents.
This very large company does ultimately depend on patents, much to the dismay of the open source community. Were they circumvented in some manner, it would certainly damage Stratasys financially.
Some of our patents have expired and others will expire in coming years. Upon expiration of those patents, our competitors have introduced, and are likely to continue to introduce, products using the technology previously protected by the expired patents, which products may have lower prices than those of our products. To compete, we may need to reduce our prices for those products, which would adversely affect our revenues, margins and profitability. Additionally, the expiration of our patents could reduce barriers to entry into AM systems, which could result in the reduction of our sales and earnings potential.
This is quite interesting, as here Stratasys officially recognizes the up and coming multiple alternative products that have apparently been slowly eating up segments of their market. While it may not be so good for Stratasys’ financials, it certainly drives competition and innovation. The system is working as designed.
Our Israeli headquarters and manufacturing and other significant operations may be adversely affected by political, economic and military instability in Israel.
This risk is unusual, as their presence in Israel does have a number of implications. One of them is that portions of their staff could be suddenly called up as military reserves, for example.
We do not anticipate paying any cash dividends in the foreseeable future. Therefore, if our share price does not appreciate, our shareholders may not recognize a return, and could potentially suffer a loss, on their investment in our ordinary shares.We intend to retain all available funds and any future earnings to fund the development and growth of our business.
No dividends? This characterizes their company as one that is intending on continual innovation. They will have no spare profits to distribute to shareholders, as they intend on using ALL profits for innovation and expansion.
We have approximately 2,500 employees and hold more than 1,200 granted patents or pending patent applications worldwide.
Definitely big. The number of patents is large, and one wonders what magic is captured by them all.
We believe that the expansion of the market will be spurred by increased proliferation of 3D content and 3D authoring tools (3D computer-aided-design, or CAD, and other simplified 3D authoring tools), as well as increased availability of 3D scanners. We also believe that increased adoption of 3D printing will be facilitated by continued improvements in 3D printing technology and greater affordability of entry-level systems.
Stratasys still strongly believes in the desktop 3D printing market and has identified here what they believe to be the key barriers. I would expect them to address these specific items in future moves.
We believe that this technology is differentiated by a number of factors that make it appropriate for 3D printing and additive manufacturing. These factors include:
the ability to use FDM ® systems in an office environment due to the absence of hazardous emissions;
the relative absence of post-production processing;
minimal material waste;
better processing and build repeatability;
ease of use, with minimal system set up requirements;
no need for costly replacement lasers and laser parts; and
a high degree of precision and reliability.
If these are their perceived strengths, then their competitors had best take notice. If you want to beat Stratasys, these are the elements you must do.
There’s so much more in this document I must stop for now.