3D Systems: Q3 Report Better Than It Looks

| About: 3D Systems (DDD)
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3D Systems (NYSE:DDD) reported Q3 earnings inline with analyst estimates, while revenue was ahead of expectations. The company has also increased full-year revenue guidance, while lowering earnings guidance, which is a consequence of increased research and development and sales and marketing spending. This was all more or less expected, as I wrote in my earnings preview on 3D Systems. The company is executing very well, and has decided to sacrifice short-term profitability in order to gain market share, as management said that the demand for its products is unprecedented.

Higher than expected revenue and in-line earnings

The company reported adjusted earnings per share of $0.26, in-line with analyst consensus estimates, and 24% higher than in Q3 2012. Revenue increased 50% to $135.7 million, ahead of estimates for $132 million. Gross margin expanded 80 basis points to 52.4%, despite the negative impact of an unfavorable product mix and the acquisition costs of RPDG and CRDM. As in the previous quarter, 3D Systems' management said that it will further increase research and development spending, as well as sales and marketing spending in order to capitalize on opportunities in a fast growing market.

Products revenue increased 56% while services revenue rose 38%. 3D printers and other products revenue increased 76% to $59.8 million. Print materials revenue rose 30% to $33.2 million. This presents significant growth acceleration over the last quarter's 12% growth in materials revenue, and is one of the segments I considered important in my earnings preview. Consumer solutions revenue was $13.5 million, which is more than double the segment delivered in the first six months of 2013. The 50% total revenue growth represents the second straight quarter of acceleration, since revenue growth in Q1 and Q2 was 31% and 44%, respectively. And since the company increased full year revenue guidance, revenue is expected to grow 53% in the fourth quarter, based on the mid-point of the new guidance.

Significant increase in R&D and marketing spending

3D Systems has significantly increased R&D and marketing spending in the third quarter. The company's R&D expenses went up 95% to $10.8 million. 3D Systems is making investments to support its near-term opportunities and expand its product portfolio. The company is also accelerating developments of key products, channels and technologies to capture more market share in production applications and the consumer segment. Phenix direct metals 3D printers were the area of significant interest and compelled the company to accelerate new products development and capacity investments.


3D Systems increased full-year revenue guidance to $500 million to $530 million, from a previous range of $485 million to $510 million. The mid-point of the new revenue guidance is $10 million above the current consensus estimates. As a result of increased spending, the company lowered full-year earnings guidance to $0.93 to $1.03. Analysts were expecting earnings of $1.01, which was lower than the company's previous earnings guidance range of $1.05 to $1.20. Since the company is sacrificing short-term profitability, I believe that the overall guidance is quite positive, especially considering the acceleration in the overall revenue growth and strong showing of consumer solutions.

Momentum stocks break down - a cause for short-term concern

In the last couple of days, we witnessed a sharp correction of momentum stocks and/or increased volatility. Shares of Tesla (NASDAQ:TSLA), Netflix (NASDAQ:NFLX), LinkedIn (LNKD) and Facebook (NASDAQ:FB) are off their highs, and there was a serious breakdown in numerous Chinese momentum stocks. This is a worrying sign, and could lead to an intermediate market correction, which might negatively impact 3D Systems as it might feel the weight of the general market.


3D Systems is delivering strong and accelerating revenue growth. The particular segments I was watching all came in better than expected: revenue growth came in better than expected (the significant acceleration of materials revenue growth is particularly important), and the results of the consumer initiative are finally visible. Gross margins improved despite the increased spending. The company has decided to sacrifice short-term earnings growth in order to increase market share and management aims to take advantage of "unprecedented advanced manufacturing and consumer demand." Although the initial market reaction was negative with the share price down in the first few hours of trading, my view is that the results are better than they look at first glance. The lowered earnings guidance is not a reason to be concerned, and the long-term prospects for the company's growth and profitability are intact, or perhaps better than previously thought. There is one reason for concern over the short-term prospects of the share price - a breakdown in momentum stocks, and the increasing risks of an intermediate market correction. Also, take a look at my article on Hewlett-Packard (HPQ) and the possible effects it might have on 3D printing companies.

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.