3D Systems (NYSE:DDD) is near its all-time highs going into earnings Tuesday. The company is delivering robust revenue and earnings growth in the last couple of years, and the growth trends are expected to continue. The growth was driven by an aggressive acquisition strategy, as 3D Systems acquired more than 30 companies in the last couple of years, and the overall growth in the 3D printing industry. Here is what we should look for in the Q3 report.
Continued strong growth of printer sales
3D Systems should continue to deliver strong printer sales in the third quarter. Management was particularly excited by the tremendous demand for its products, and has decided to ramp up research and development, as well as sales and marketing spending to capitalize the significant growth opportunities. 3D printer and other products revenue surged 108% in the second quarter. Phenix acquisition was completed in the second quarter, which will further strengthen the company's product portfolio, and enhance its position in the fast growing aerospace, automotive, defense and healthcare manufacturing industries.
Accelerating materials revenue growth
Materials revenue growth was the slowest growing segment in the second quarter, with a 12% increase in revenue. The company expects the materials revenue growth to accelerate in the second half of the year. Materials sales usually lag printer sales, and given the significant printer sales growth in the last couple of quarters, materials revenue growth should accelerate significantly in the next couple of quarters. This should contribute to further gross margin expansion, as the materials segment has a much higher margin than other business segments.
First visible results of the consumer initiative
The third quarter should show the first visible results of the enhanced consumer initiative. The company has signed distribution deals with Synnex (NYSE:SNX) and Staples (NASDAQ:SPLS) recently, and it will be interesting to see if there are visible results of the initiative. William Blair reported in late September that Staples sales checks pointed to weak consumer demand and William Blair could only confirm the sale of two Cube printers.
A boost in R&D and sales and marketing spending
3D Systems announced in the Q2 report that the company has decided to increase research and development and sales and marketing spending, to fully capitalize on the emerging opportunities and the tremendous demand for its products and services. This should put pressure on profit margins, which should be offset by higher materials revenue, which carries the highest gross margin. So, the gross margin should be flat or expand slightly in the second half of the year.
High expectations equal high volatility
3D Systems is always very volatile after the earnings announcement. Revenue growth deceleration, margin compression and weak results of the consumer printer sales would have a negative impact on the share price after the earnings announcement. Revenue growth (particularly materials revenue growth) and gross margin are the key metrics I will be looking at after the report is out, as well as the update on the consumer initiative. Wall Street has high expectations, which are reflected in the company's valuation. If the company falls short on what it promised, the share priced could be severely punished.
3D Systems is expected to report robust third quarter growth. We should see the first visible results of the enhanced consumer initiative, and accelerated growth in materials revenue. Although the accelerated revenue growth in the materials segment will bring gross margin expansion, this should be partly offset by increased R&D and sales and marketing spending. The key metrics to watch in the third quarter report are: revenue growth (particularly materials revenue growth, and consumer printer sales) and gross margin. High volatility after the report is to be expected, and the share price could be punished if the company falls short on what it promised.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.