3D Systems: Short-Term Issues Should Give Rise To Long-Term Benefits

| About: 3D Systems (DDD)


3D Systems is down this year, but the company is on track to benefit from various new applications such as the Project Ara and secular growth of 3D printing.

3D Systems is diversifying itself to tap more end markets through acquisitions, and this is a smart move.

3D Systems is upgrading its manufacturing facilities to meet impending demand for 3D printing applications.

After a terrific performance in 2013, 3D Systems (NYSE:DDD) has disappointed investors massively in 2014, losing around 45% of its market capitalization. A string of weak quarterly results have weighed on 3D Systems' performance, and the recent second quarter was no different either. 3D Systems once again failed to impress the Street with its results, as its numbers were below the consensus estimate.

Moreover, its bottom line dwindled year over year. One of the reasons behind 3D Systems' weak performance is the delay in launch of new products. This is affecting its revenue opportunities, and subsequent costs related to these new launches will weigh on its margins. However, the good thing is that 3D Systems' top line is showing strength, growing 25% year over year last quarter.

Also, 3D Systems raised its revenue outlook for the year, which shows that the company's performance could improve as new products come into the market.

Looking beyond the short-term

3D Systems had delayed shipments of some products to improve user experience. The company began the shipment of its new CubePro printer and iSense scanner in July, while more products are planned for the coming months. These new products will be shipped in the upcoming quarters, which will boost its revenue in the second half of the fiscal year. Also, 3D Systems increased its spending on research and development by 84% year over year. As a result, the company launched ten new products during the first six months, and management expects more launches in the second half as well.

3D Systems is also in a partnership with Google (NASDAQ:GOOG) (NASDAQ:GOOGL) to 3-D print phones based on the Project Ara platform. Through Project Ara, Google is looking to manufacture a number of modular smartphones. In fact, Google has an ambitious target of selling billions of phones through Project Ara. According to Google:

"The smartphone is one of the most empowering and intimate objects in our lives. Yet most of us have little say in how the device is made, what it does, and how it looks. And 5 billion of us don't have one. What if you could make thoughtful choices about exactly what your phone does, and use it as a creative canvas to tell your own story?

Introducing Project Ara.

Designed exclusively for 6 billion people."

It is estimated that Google will price the modular smartphone at a basic $50. As such, the company can expect to move a large number of phones. Hence, if this initiative takes off, 3D Systems will have another catalyst on its hands.

The previous quarter's performance might have been disappointing, but management believes that this was only a temporary setback on account of various transitional forces during the period. According to 3D Systems' CEO Avi Reichental, "A detailed examination of the specific drivers confirms that our fundamentals are intact and our gross profit margins are poised to rebound and resume their expansion trajectory." There is no doubt that the demand for its 3D Printers is increasing, as the company reported a 126% increase in units sold.

Diversification in the cards

Apart from engineering applications, the company is extending its reach into the medical market, with the acquisition of various companies in this segment. During the quarter, 3D Systems acquired Medical Modeling. With this new addition, the company can now provide virtual surgical planning, guiding, and 3-D printing of medical devices.

Additionally, it has signed an agreement to acquire Simbionix, which is a leading provider of 3-D virtual reality surgical simulation and training product. The deal also included a complimentary global sales channel. This will enable the company to expand its digital platform to medical services for the development of new and improved machines that can be used for surgical and other medical uses. Robtec is another deal, which the company will close in the second half of this fiscal that will open doors for the 3-D printer maker in Latin America.

3D Systems is also expanding its reach into the manufacturing segment. It recently announced that it has acquired Laser Reproductions, "An expert provider of advanced manufacturing product development and engineering services, further extending its Quickparts operations in the United States." 3D Systems didn't disclose any terms of the transaction, but expects the deal to expand its expertise. According to a press release:

"Laser Reproductions brings to 3DS three decades of advanced manufacturing service bureau experience with substantial production capabilities that are rooted in regional infrastructure and supported by long-term, key relationships with regional blue chip companies. The transaction is expected to be immediately accretive to 3DS' cash generation and to contribute to its non-GAAP earnings per share within the first 12 months."

Hence, 3D Systems is expanding its reach into various segments of the 3D printing market. So, it is not surprising that the company is experiencing solid growth in its metal printers, which is outpacing supply. Consequently, 3D Systems has enlarged its Phoenix manufacturing facility to the maximum limit, and is also bringing preparing a system manufacturing facility in the U.S during the third quarter.

This will give the company ample room for producing sufficient metal printers by 2015. Apart from this, it has also purchased an additional 200,000 square-foot manufacturing facility in Rockville, South Carolina, to expand its production capacity.

Going forward, management expects its printer margins to improve in the third quarter, as its operating expenses stabilize. Along with its ongoing acquisitions, 3D Systems has added some major distributors such as ScanSource (NASDAQ:SCSC), Konica Minolta KNCAF), and Cannon Marketing Japan that will improve its performance going forward.


3D Systems is making good progress. Although the company is seeing some short-term hiccups, the long run opportunity still appears strong. Driven by its acquisitions and the launch of new products, 3D Systems is making the right moves to tap the 3-D printing market. As such, investors should focus on the company's long-term prospects as 3D Systems looks set to deliver growth in the long run.

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The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.