Networking Technologies

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1 INDUSTRY NOTE Networking Technologies 3D Printing Update- Takeaways From RAPID and Recent 3D Systems Acquisition CONCLUSION We attended the RAPID 3D printing conference in Pittsburgh and came away incrementally more upbeat on the 3D printing space based on feedback from various industry contacts. Attendance at RAPID this year was up roughly 60% from the prior year to 2,400 attendees and the tone at the event was very positive. While metals remained the hottest topic at RAPID, it appears overall demand for systems, materials, and services has tracked above plan in Q2 and we are anticipating another favorable earnings season for the industry. Based on conversations with private companies, 3D printing resellers and other industry contacts, we continue to believe the 3D printing space will continue to grow in the 20-25% range for the foreseeable future and we recommend investors get exposure to this fast growing industry. Highlights From RAPID - Attendance at the RAPID conference was up roughly 60% y/y and nearly every contact we spoke to indicated this was far and away the best RAPID show ever. Booth traffic was up significantly and the quality of leads generated were well above previous years. While equipment sales typically don't get closed at RAPID, we believe the activity at RAPID is indicative of overall industry demand outpacing company expectations and anticipate this strong demand will continue for the industry. Troy D. Jensen, CFA Sr Research Analyst, Piper Jaffray & Co , troy.d.jensen@pjc.com Joshua L. Kozberg Research Analyst, Piper Jaffray & Co , Joshua.L.Kozberg@pjc.com Related Companies: Share Price: DDD PRLB SSYS RISKS Competitive pressures, a macro slowdown and the sustainability of top-line growth. Metal Update - The metal 3D printing market remains one of the fastest growing segments in the broader 3D space. We had the opportunity to meet up with several industry leaders in the metals space, including Arcam, ExOne, Concept Lasers, SLM Solutions, and OPTOMEC. All these companies indicated strong demand trends through the first few months of Q2 and we anticipate this robust demand will continue throughout the remainder of Recent conversations with system manufacturers and resellers suggests that sales cycles have continued to shorten, which we believe will help translate to 30%+ growth for the metal 3D printer space in Service Bureaus Bullish - In addition to system manufacturers, we had the opportunity to touch base with several large service bureaus within the US and Overseas markets. Based on conversations with these industry contacts, we believe demand for service bureaus has remained strong in Q2, with multiple operators noting 25-40% growth YTD. The longer-term outlook also appears promising, as many of our industry contacts believe that 25-35% growth is sustainable over the next several years. 3D Systems Acquisition- During the conference, 3D Systems announced the acquisition of Phenix, a metal-based 3D printing manufacturer based in France. The company currently offers 3 metal 3D printers, each utilizing the Selective Laser Sintering method of printing. Phenix is one of the smaller players in the metal market and competes with Arcam, EOS, SLM Solutions, Concept Lasers and others. We view the acquisition as a favorable move for 3D Systems, as this helps strengthen the company s portfolio within the medical, aerospace and automotive fields. Management expects the acquisition to close in July and be accretive to non- GAAP earnings. Piper Jaffray does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decisions. This report should be read in conjunction with important disclosure information, including an attestation under Regulation Analyst certification, found on pages 7-10 of this report or at the following site: Page 1 of 10

2 COMPANY NOTE RAPID TAKEAWAYS AND 3D SYS TEMS ACQUISITION Quick Takeaways 3D Systems Update 3D Systems Acquires Phenix Systems We attended the RAPID 3D Printing Conference at the David L. Lawrence Convention Center in Pittsburgh on June th and had the opportunity to meet with several key executives from some of the largest 3D printing companies in the industry. Attendance at the conference was estimated to be up roughly 60% year-over-year to 2,400 attendees, highlighting the increasing awareness and growing interest the 3D market is generating. While metals remained the hottest topic at the event, it appears that demand for systems, materials, and services across all technologies have tracked above plan in Q2, a trend which we expect will continue throughout the year. Furthermore, optimism surrounding material advancements, system capabilities and increasing applications has left us with increased confidence in our longer-term market forecasts, and believe the 3D space will continue to grow 20%+ for the foreseeable future. We had the opportunity to catch up with 3D Systems CEO Avi Reichental, along with CFO Damon Gregoire. We came away with increased confidence with regards to 3D Systems aggressive acquisition strategy, and feel the company has positioned itself more effectively across multiple verticals within the 3D content and printing space. At the event, the company unveiled the VisiJet M3 Black material, which is utilized within 3D Systems Jetting line of printers (Projet 3500 recently refreshed). Management believes this is the most significant material announcement in recent memory (highest durability properties) and anticipates this will be a key element in driving market share gains within the jetting market. Outside of materials, the company showcased their new scan and reverse engineering software platforms, which the company acquired through their Geomagic and RapidForm acquisitions. Although channel integration appears limited through the first few months, we believe the newly acquired software products represent one of the better growth opportunities for the company and expect gradual reseller integration in the second half of Although management did not release any new systems at the event, we believe the company is preparing to announce multiple high end refreshes at their analyst day next week, specifically geared towards their legacy Stereolithography and Selective Laser Sintering machines. Given the popularity these systems generate within the service bureau vertical, we expect the refresh to drive additional sales in the second half of the year. During the last day of the conference, 3D Systems announced the acquisition of Phenix Systems, a metal-based 3D printing manufacturer headquartered in Riom, France. 3D Systems has agreed to acquire 80% of the outstanding shares, at a maximum price of 13/per share; this leaves 20% of shares left to trade on the open market (the company expects to later purchase the remaining portion through a take-over bid). We view the acquisition as a favorable move for 3D Systems, as this helps strengthen the company s portfolio within the medical, aerospace and automotive fields. Prior to the acquisition, we estimate that less than 5% of 3D Systems sales were derived from the metals market, which means integration and product overlap risk are virtually eliminated. Furthermore, we believe 3D Systems channel strength will help accelerate unit growth for Phenix Systems, and believe there will be multiple cross and up sell opportunities for current systems already in the market. Management expects the deal to close by July of 2013, and be accretive to non-gaap earnings on a full year basis. The exhibit below highlights the PXM, PDX and PXD SLS printers from Phenix. Page 2 of 10

3 COMPANY NOTE Exhibit 1 P H E N I X P R O D U C T P O R T F O L I O Source: PJC Research, Phenix Website Who is Phenix? Phenix Systems was founded in 2000 and is based in Riom France. The company manufactures metal (and ceramic) based 3D printers for use in the Automotive, Aerospace and Medical verticals. Phenix currently offers three different systems based on Selective Laser Sintering technology, including the PXL, PXM and PXS units. Material support includes stainless steel, tool steel, non-ferrous alloys, precious metals and alumina powders used for prototyping and end-user part production. Phenix printers produce chemically pure, fully dense parts, which remains consistent with 3D Systems criteria for acquiring a metals play. We note only a handful of other metal-based manufacturers can accomplish this. Based on financials from Bloomberg.com, Phenix achieved 2012 sales of 4.6M, down from 5.2M in the prior year. Gross profit margins remain in the high 50 s, and would expect further expansion post merger. The company competes directly with Arcam, EOS, Concept Lasers and SLM Solutions within the metal laser sintering markets, which 3D had little exposure to prior to the acquisition. The exhibit below highlights financial estimates for Phenix over the past four years. Exhibit 2 P H E N I X F I N A N C I A L S FY 2009 FY 2010 FY 2011 FY 2012 Revenue Cost of Sales Gross Profit SG&A Depreciation & Other Operating Profit Interest Expense Taxes Paid Net Income Margin Analysis Gross Profit 52.9% 60.0% 55.8% 58.7% Operating Income 8% 11% -12% -43% Net Income 6% 8% -6% -41% Y/Y Growth Revenue 27.5% -20.0% -11.5% Gross Profit 44.4% -25.6% -6.9% Operating Profit 75.0% % % Net Income 66.7% % % Source: PJC Research, Bloomberg Page 3 of 10

4 COMPANY NOTE Stratasys Update Metals Update Service Market Recent Capital Raise We had the opportunity to host a meeting with Scott Crump, Chief Innovation Officer at Stratasys Ltd, along with several key executives from various business units (RedEye and DDM). General tone was fairly upbeat, with management noting that Q1 numbers were inline with internal expectations while reiterating their belief in a significant second half acceleration (we estimate 90%+ of channel revenue is now accounted for, limiting channel disruption in 2H). Following our meeting with the company, we remain comfortable with our current model assumptions for FY13, which imply 21.5% top-line growth and modest margin expansion (+100bps). Although guidance was left unchanged, we foresee FY13 sales towards the higher end of the expected range, given our expectation for a fully merged channel post Q2. Metal 3D printing was by far and away the most anticipated topic at RAPID this year, as increasing system capabilities and material properties have propelled metal based technologies to the forefront of investor interest. The recent endorsements of GE Aviation into the 3D space have validated the current technology, and we expect other aerospace and automotive companies to follow suit throughout the year. The metal 3D printing market remains one of the fastest-growing segments within the broader 3D space, as Wohlers estimates roughly 200 metal printers were shipped in 2012, up significantly from levels achieved just 5 years ago. We had the opportunity to meet up with several industry leaders within the metals space, including Arcam AB, ExOne, EOS, Concept Lasers, SLM Solutions, and OPTOMEC. All companies indicated strong demand trends through the first few months of Q2. Recent conversations with multiple system manufacturers and resellers suggest that sales cycles have continued to shorten, which we believe will help translate to 30%+ growth for the metal space in In addition to system manufacturers, we had the opportunity to touch base with several large service bureaus within the US and Overseas markets. Recent data points suggest that demand for service work has remained strong in Q2, with multiple operators noting 25%+ growth YTD (on a Y/Y basis). The longer-term outlook also appears promising, as many of our industry contacts believe that 25-35% Y/Y growth is within reach. We note that in 2012, the service market grew 36% year-over-year, accounting for nearly 55% of all sales. Given the importance service market demand has on the rest of the 3D space (sales leads, system investments, consumable usage), we believe recent data points shed a positive light for system and consumable demand for the remainder of the year. On top of strong revenue trends, multiple industry contacts noted that pricing has actually improved over last year, which we attribute to increasing demand for higher quality materials coupled with ongoing consolidation within the space (mostly DDD). We expect further consolidation will improve the pricing dynamic within the service market, which bodes well for 3D Systems, Stratasys, Proto Labs and others. More recently, we highlight Shapeway s recent capital raise as a sign of increasing interest and conviction towards the 3D service market. On April 23 rd 2013, Shapeways announced a $30 million Series C round of financing led by investment firm Andreessen Horowitz. Chris Dixon, Partner at the Andreessen Horowitz, will assume a board position at the company going forward. Current investors (Union Square Ventures, Index Ventures and Lux Capital) were also part of the financing round, which follows three prior rounds of capital raise, where Shapeways brought in roughly $17 million. The company intends on using the new capital for capacity expansion, further technological investments and additional hiring, and hopes to bring their business to additional metropolitan areas around the country. This should help the company improve turnaround times and continue to build out their manufacturing capabilities through new system purchases, material investments and software upgrades. Moreover, their new facility is expected to house some 50+ machines, capable of producing over 5 million products per year, well above current capacity. Page 4 of 10

5 COMPANY NOTE Technologies and Company Positioning The exhibits below highlight the various print technologies within the 3D market and where each respective system manufacturer currently sits. While many believe increasing competition represents significant risk for the various public system manufacturers, we would point out that each technology is used across a variety of applications, and believe each will grow considerably over the next few years. Exhibit 3 3 D P R I N T I N G T E C H NOLO G I E S Process Description Example Materials Pros Cons Digital Light Processing (DLP) Light exposed polymer liquid resin, polymer Similar to SLA quality. Can produce high quality and complex geometries Parta are generally w eaker than other methods Electron Beam Melting (EBM) Melting metal powder using electron beam in high vacuum Metals, Titanium alloy Fully dense (100%) and extremely durable; no post thermal treatment required poor surface finish combined w ith expensive materials Fused Despoition Modeling (FDM) Fused extrusions ABS, PC, PC/ABS, PPSU Parts are relatively strong and can be Poorer surface finish and slow er good for some functional testing; can build times than SLA and SLS make complex geoemetries Inkjet (MJM, Polyjet, Etc) Powder Binding UV cured jetted photopolymer Liquid binder inkjet printed onto powder Acrylic based photopolymers, elastomeric photopolymers Plaster-based powder/liquid binder Yields the best surface finish of additive processes and is the best choice for complex parts w ith undercuts. Poor strength compared to SLA. Fastest time of any additive process; Parts are rough and less durable can print in multiple color combos and and there are few er material is one of the least expensive options options. for prototyping Steriolithography (SLA) Laser cured photopolymer "Thermoplastic-like" photopolymers Can produce parts w ith complex geometries and excellent surface finishes compared to other additive processes Parts are w eaker than those made from engineering grade resins; typically unsuitable for functional testing Selective Laser Sintering (SLS) Laser sintered powder Nylon, metals More accurate and durable than SLA parts; can make parts w ith complex geometries Surface finish not smooth (grainy) and typically not suitable for functional testing due to their reduced mechanical properties. Source: PJC Research, Company Websites Exhibit 4 C O M P A N Y P O S I T I O N I N G B Y T E C H N O L O G Y SLA SLS/EBM FDM DLP/FTI MJM/Polyjet Powder Binding 3D Systems ipro Projet spro60hd/sd spro Consumer End Projet1000/1500 Projet3500 series Zprinter Arcam - Arcam A1, A2, Q Concept Lasers - M1, M2, M EnvisionTEC - - Bioplotter Ultra, Perfactory - - EOS - MLS, PLSS, SLSS ExOne S-Print, M-Print, M-Flex Formlabs Form Makerbot - - Replicator 2, 2X SLM Solutions - SLM 125, 250, 280, Stratasys - - Fortus, Dimension, uprint, Mojo - Connex, Eden, Desktop - Phenix - PXL, PXM, PXS + Dental Versions Source: PJC Research, Company Reports and Company Websites Page 5 of 10

6 COMPANY NOTE Price Targets and Risks SSYS is currently rated Overweight with a $96 price target based on 35x 2014E Op Inc. plus Cash. Risks include, but are not limited to: Potential margin pressure, uncertainty associated with the new low-cost 3D printing market, small company size, and low stock liquidity. DDD is currently rated Overweight with a $52 price target based on 35x CY14E Op. Inc. + cash. Risks include, but are not limited to: Sustainable top-line growth; substantial market share gains; improved execution resulting in a material boost to EPS. PRLB is currently rated Overweight with a $58 price target based on 32x CY14E Op. Inc. + cash. Risks include, but are not limited to: Macro economic slowdown; disruptive new technologies; software duplication. Page 6 of 10

7 INDUSTRY NOTE IMPORTANT RESEARCH DISCLOSURES Notes: The boxes on the Rating and Price Target History chart above indicate the date of the Research Note, the rating, and the price target. Each box represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first Note written during the past three years. Legend: I: Initiating Coverage R: Resuming Coverage T: Transferring Coverage D: Discontinuing Coverage Page 7 of 10

8 INDUSTRY NOTE S: Suspending Coverage OW: Overweight N: Neutral UW: Underweight NA: Not Available UR: Under Review Distribution of Ratings/IB Services Piper Jaffray IB Serv./Past 12 Mos. Rating Count Percent Count Percent BUY [OW] HOLD [N] SELL [UW] Note: Distribution of Ratings/IB Services shows the number of companies currently in each rating category from which Piper Jaffray and its affiliates received compensation for investment banking services within the past 12 months. FINRA rules require disclosure of which ratings most closely correspond with "buy," "hold," and "sell" recommendations. Piper Jaffray ratings are not the equivalent of buy, hold or sell, but instead represent recommended relative weightings. Nevertheless, Overweight corresponds most closely with buy, Neutral with hold and Underweight with sell. See Stock Rating definitions below. Analyst Certification Troy D. Jensen, CFA, Sr Research Analyst Analyst Certification Joshua L. Kozberg, Research Analyst The views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Page 8 of 10

9 INDUSTRY NOTE Research Disclosures Piper Jaffray was making a market in the securities of 3D Systems Corporation at the time this research report was published. Piper Jaffray will buy and sell 3D Systems Corporation securities on a principal basis. Piper Jaffray expects to receive or intends to seek compensation for investment banking services from 3D Systems Corporation in the next 3 months. Piper Jaffray has received compensation for investment banking services from or has had a client relationship with 3D Systems Corporation within the past 12 months. Within the past 12 months Piper Jaffray was a managing underwriter of a public offering of, or dealer manager of a tender offer for, the securities of 3D Systems Corporation or the securities of an affiliate. Within the past 3 years Piper Jaffray participated in a public offering of, or acted as a dealer manager for, 3D Systems Corporation securities. Piper Jaffray was making a market in the securities of Proto Labs, Inc. at the time this research report was published. Piper Jaffray will buy and sell Proto Labs, Inc. securities on a principal basis. Piper Jaffray has received compensation for investment banking services from or has had a client relationship with Proto Labs, Inc. within the past 12 months. Within the past 12 months Piper Jaffray was a managing underwriter of a public offering of, or dealer manager of a tender offer for, the securities of Proto Labs, Inc. or the securities of an affiliate. Piper Jaffray has received non-investment banking securities-related services from or has had a client relationship with Proto Labs, Inc. in the past 12 months. Within the past 3 years Piper Jaffray participated in a public offering of, or acted as a dealer manager for, Proto Labs, Inc. securities. Piper Jaffray was making a market in the securities of Stratasys Ltd. at the time this research report was published. Piper Jaffray will buy and sell Stratasys Ltd. securities on a principal basis. Piper Jaffray has received compensation for investment banking services from or has had a client relationship with Stratasys Ltd. within the past 12 months. Piper Jaffray research analysts receive compensation that is based, in part, on overall firm revenues, which include investment banking revenues. Rating Definitions Stock Ratings: Piper Jaffray ratings are indicators of expected total return (price appreciation plus dividend) within the next 12 months. At times analysts may specify a different investment horizon or may include additional investment time horizons for specific stocks. Stock performance is measured relative to the group of stocks covered by each analyst. Lists of the stocks covered by each are available at researchdisclosures. Stock ratings and/or stock coverage may be suspended from time to time in the event that there is no active analyst opinion or analyst coverage, but the opinion or coverage is expected to resume. Research reports and ratings should not be relied upon as individual investment advice. As always, an investor s decision to buy or sell a security must depend on individual circumstances, including existing holdings, time horizons and risk tolerance. Piper Jaffray sales and trading personnel may provide written or oral commentary, trade ideas, or other information about a particular stock to clients or internal trading desks reflecting different opinions than those expressed by the research analyst. In addition, Piper Jaffray technical research products are based on different methodologies and may contradict the opinions contained in fundamental research reports. Overweight (OW): Anticipated to outperform relative to the median of the group of stocks covered by the analyst. Neutral (N): Anticipated to perform in line relative to the median of the group of stocks covered by the analyst. Underweight (UW): Anticipated to underperform relative to the median of the group of stocks covered by the analyst. Page 9 of 10

10 INDUSTRY NOTE Other Important Information The material regarding the subject company is based on data obtained from sources we deem to be reliable; it is not guaranteed as to accuracy and does not purport to be complete. This report is solely for informational purposes and is not intended to be used as the primary basis of investment decisions. Piper Jaffray has not assessed the suitability of the subject company for any person. Because of individual client requirements, it is not, and it should not be construed as, advice designed to meet the particular investment needs of any investor. This report is not an offer or the solicitation of an offer to sell or buy any security. Unless otherwise noted, the price of a security mentioned in this report is the market closing price as of the end of the prior business day. Piper Jaffray does not maintain a predetermined schedule for publication of research and will not necessarily update this report. Piper Jaffray policy generally prohibits research analysts from sending draft research reports to subject companies; however, it should be presumed that the analyst(s) who authored this report has had discussions with the subject company to ensure factual accuracy prior to publication, and has had assistance from the company in conducting diligence, including visits to company sites and meetings with company management and other representatives. Notice to customers: This material is not directed to, or intended for distribution to or use by, any person or entity if Piper Jaffray is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to such person or entity. Customers in any of the jurisdictions where Piper Jaffray and its affiliates do business who wish to effect a transaction in the securities discussed in this report should contact their local Piper Jaffray representative. Europe: This material is for the use of intended recipients only and only for distribution to professional and institutional investors, i.e. persons who are authorised persons or exempted persons within the meaning of the Financial Services and Markets Act 2000 of the United Kingdom, or persons who have been categorised by Piper Jaffray Ltd. as professional clients under the rules of the Financial Conduct Authority. United States: This report is distributed in the United States by Piper Jaffray & Co., member SIPC, FINRA and NYSE, Inc., which accepts responsibility for its contents. The securities described in this report may not have been registered under the U.S. Securities Act of 1933 and, in such case, may not be offered or sold in the United States or to U.S. persons unless they have been so registered, or an exemption from the registration requirements is available. This report is produced for the use of Piper Jaffray customers and may not be reproduced, re-distributed or passed to any other person or published in whole or in part for any purpose without the prior consent of Piper Jaffray & Co. Additional information is available upon request. Copyright 2013 Piper Jaffray. All rights reserved. Page 10 of 10