3D Systems: What To Make Of The Earnings?

| About: 3D Systems (DDD)

3D Systems (NYSE:DDD) is one of the most exciting stocks in the market. The company has reported double-digit revenue growth in each of the last four quarters, which is extremely impressive taking into account the overall conditions of the global economy. Today the company reported its fourth quarter and full year results, and the growth in the main areas for the company has been solid. However, despite impressive growth in all the areas, the company missed the estimates for the top-line as well as the bottom-line by small margins. Let's take a look at the earnings and the future outlook of the company.

Impressive Growth in Earnings

Revenue for the company grew by 52% year-over-year and went up to $154.8 million. Printer and other products sales were at the forefronts of the increase in revenue, and recorded an increase of 76% year-over-year - total unit sales more than tripled. The growth in revenues was lower than the company expected. Also, the company missed revenue estimates by $0.18 million for the quarter. The reason for the revenue miss seems the company's inability to convert its order backlog into revenues - according to the management, the order backlog has nearly doubled from the previous quarter. Whenever the revenue growth of 3D systems has been discussed, organic growth has been an important element. Organic growth for the quarter stood at 34% while for the year organic growth figures came at 29%. In my opinion, organic growth of around 30% is extremely impressive, and increased sales of printers and materials indicate that the growth in the core segments remains strong.

3D Systems also recorded 53% increase in gross profit; however, the gross profit margin remained flat at around 52%. Higher volume sales were the main reason for gross profit expansion, and it also indicates the company is able to manage production costs. Segment wise break-up shows that the consumer solution segment was the winner with 162% growth in revenues; however, despite these growth figures, the total revenues for the segment fell below company's expectations - health care and services revenue grew by 67% and 33%, respectively. For the full year, printers and products revenue went up by 80% to $227.6 million - the highest growth was witnessed in the customer solutions segment which grew by 206% during the last year - Healthcare, services and print materials revenue went up by 45%, 27% and 24%, respectively.

Non-GAAP net income for the quarter stood at $19.7 million while the GAAP net income was $11.2 million. GAAP earnings per share for the quarter stood at $0.11 and non-GAAP earnings per share at $0.19, missing the estimates by $0.01 per share. For the full year, GAAP earnings stood at $0.45 per share while non-GAAP earnings were $0.85 per share.

Printers and other products are the biggest component of the total revenues at 44% while the materials segment stood at 25%, and services segment at 31%. Geographically, North America is still the biggest region for 3D systems and contributed 55% towards the total revenues. Europe is the second largest region with 26% share in revenue followed by Asia-Pacific with 19%. There was also an increase of more than 50% year-over-year in R&D expenses from $7.8 million to $16.6 million. Non-GAAP SG&A expenses have gone up by about 34% for the company, mainly due to the increase in the marketing expenses - the company has invested heavily in developing channels and new product launches. The biggest increase in the expense came from the sales and marketing section, which grew by 65%, followed by R&D and G&A at 53% and 23%, respectively. The sales and marketing expenses were $5.1 million more than the company expected due to the product launches, channel expansion and acquisitions. G&A expenses mainly went up due to an increase in legal costs, bad debts and increased costs from recently acquired companies.

Finally, let's take a look at the cash and inventory levels-the cash balances for the company increased by 96.5%, mainly due to the stock offering of $272 million - cash from operations was $25 million. An increase of about 80% in inventories clearly shows that the company is building up inventory for expected increase in demand.

Key Points to Consider

  • The company expects its organic revenue to remain close to 30% over the next year, and the revenue is expected to be close to $700 million. At the moment, metal printing segment is not included in the organic growth calculation - this segment is expected to bring substantial revenues as there is massive demand for the products. At the end of the second quarter of 2014, the company will start to integrate revenue from this segment into the organic growth calculation.
  • The margins are expected to remain flat - the company will continue to invest over the next few quarters in order to get a bigger share in the market, which means lower or flat margins in the short-term. However, in the long-term, margins should start to expand. In the long-term, the company expects the gross margin to be between 55-60%. In 2015, 3D Systems expects to reach $1 billion in revenues, which means that the company will have to grow revenues by about 100% over the next two years.
  • By the end of 2015, the company expects to have operating leverage, meaning the profitability will increase and the margins will expand. Research and development expenses over the next two years will remain close to 8% of the total revenues.
  • As I have mentioned in my previous articles, the materials segment is very important for the company - we will see higher growth in this segment in future as the sales of printers will increase the demand for materials. As a result, I believe the materials segment will have a big role in enhancing the long-term growth of the company
  • And finally, the order backlog of the company has almost doubled, which means the growth in sales should be strong over the next few quarters - growth in sales in the later part of the year are expected to be higher than the first two quarters.


The growth in some of the segments was not in line with the expectations of the company; however, the market seems to be happy with the results. The stock is trading up after the earnings announcement. I believe the growth will remain strong for the company and the prospects are good. As I have said in my previous articles, management's decision to sacrifice short-term profitability in favor of long-term growth is admirable and the shareholders should be happy with the management. In my opinion, 3D Systems remains a strong buy.

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.