I am a private investor not associated with any hedge funds, mutual funds or private equity or investment fund. I am a current shareholder of DDD and expect to add on to my position on any dips. This is a rebuttal to Mr. House's article:
1. None of Mr. House's comments dealt with the fact that the ongoing revenues of DDD are growing nicely on a consolidated basis and earnings, margin and days of sales of AR are all in line commensurate with the growth. These are the real key barometers to the health of a business. If DDD's acquisitions are so worthless as Mr. House suggests, why would sales be growing and margins growing so nicely? Buying dead businesses and worthless technology as Mr. House implies doesn't give off this kind of growth and earnings and cash flow profile. What a disastrous buying campaign would bring would be flat sales, growing AR days of sales and no cash flow... DDD is far from that today.
2. A huge amount of Mr. House's analysis dealt with the OLD DAYS which are completely irrelevant to this dynamic market. Talking about $4 to $6mm of management participation in acquisition of various companies is completely irrelevant to the health of DDD as a billion+ market cap business. Circumstances leading to such transactional details can often be dictated by specific issues which have nothing to do with impropriety or management greed. In any case, it is irrelevant in the scale of things and Mr. House has zero proof anything nefarious other than a simple mathematical analysis and dubious assumptions on his part as to the reasons for them. All negative hype and no facts.
3. This 3D Printing market is obviously a dynamic, fast changing and revolutionary business that even one year can seem like a lifetime for any participant. Spending ink on discussing what the company did during 2003 to 2008 is completely irrelevant to where the company is at today or where it likely will be tomorrow. This 3D printing industry was in its infancy back in the early 2000s, lots of trial and error took place both in terms of technology and the specific market niche that the market is growing in. Rather than giving management kudos for having navigated a dynamic and explosively growing and chaotic market space nicely, Mr. House chose to discuss meaningless acquisition of by now irrelevant amounts and make mountains in his analysis out of such molehills. Mr. House, if you go take a look at Cisco's thousands of acquisitions over the past 20 years, you will be able to find lots of irrelevant and disastrous acquisitions too. But, is Cisco a success and a giant or is Cisco a failed company? Why don't you write an article of how Brin and Page wrote their first software code for Google ten years ago and link that to the future of Google going forward?
3. Mr. House's article is also void in terms of understanding the necessary strategic thinking to manage in this world-changing market space we call 3D Printing. DDD is simply engaging in the tried and true method Cisco employed in becoming Cisco. Use the cheap equity prices it commands and purchase as much technology, and yes, customer channels it can get worldwide. This is smart and well proven as useful and good for shareholders in the high tech space. Not frivolous or suspicious as Mr. House suggests. No one company can hope to manage to own all the right patents to this world changing and industry changing 3D printing business going forward. But, a good strategy is to grab as many patents - 1600 and growing and customer channels it can while it can while the game is early and relatively cheap. By doing so, management not only gain worldwide sales coverage, they also see much of the playing field and they can more easily concentrate and direct their efforts into the best growing segments at the earliest stage of the industry as possible vs. a competition who seems to be happy participate in only three or four lines of business within this dynamic space. No one in the world knows where 3D printing technology, or its ultimate spin-offs will be in ten years but the company who can successfully get there will be the huge winner and I will bet any money that a company who owns 1600 patents and 320 distributor channels today and moving in that direction stands a much greater chance of being the winner rather than the loser of this upcoming strategic race.
4. Amortizing the technology part of the goodwill in one year or two as Mr. House has "discovered" is actually a good conservative accounting practice by management. It absolutely does not mean those goodwill are worthless as Mr. House implied. They are buying patents. They are buying technology, know-how and such. Yes, they are paying a premium but this is the kind of business that if just ten patents turn out to be a blockbuster, it is worth the 500 it took to get there. I applaud management for taking such a conservative view on writing off goodwill. A "suspicious" management would be one that clings on to worthless goodwill and not writing it off. Mr. House, you are way off here again. Counting numbers and not thinking through what are best management practices. And, as we all know, a few meaningless patent today can become worthy legal barriers of entry tomorrow - ie; Apple vs. Samsung. Which would you rather have, 1600 patents or 50?
5. The consumer segment is a new segment to promote the idea of 3D printing while gaining additional insight into the viability of this business in changing the price point. Mr. House, if you had taken time to listen to the last quarterly management briefing, you will note that management studiously refused to even count and take credit for any growth Cubify afforded the last quarter. The repeatedly say this is a new segment and perhaps, they will account for it next quarter or beyond. NO ONE in management is hyping Cubify beyond normal marketing needs. And, no one expects except you a $1300 machine will make perfect seams in the year 2012 but look out 2020. Often times, trying a different footprint and pricing channel often leads to unexpected positive surprises as various entrepreneurs that otherwise won't have access to a $20,000 large format machine will innovate from having access to such a potentially powerful manufacturing and creative tool and grow businesses as a result. Innovation comes in all ways and broader access to the world is always a good thing especially if it is not a material negative margin item and certainly, no evidence to date suggests DDD is selling Cubify at any kind of a loss. Additionally, Mr. House have you actually tried one of the machines? Have you looked into how Cubify simplified the design phase of 3D Printing and made it easily understandable for a non CAD user? This is exactly what PC did for the computer world - simplified the use of it rather than leaving it programmers versed in mainframe programming only. We wouldn't have the world we have today if the PC didn't show up. Instead of being a dinosaur and staying like Digital Equipment was in the 70s in the mainframe world, going to small format challenges a company and makes the industry grow. Smaller, faster, better, cheaper is always a better strategy than to stay as a big hunkering dinosaur machine manufacturer as Mr. House would advise management to do. That is management 101 in today's world. I wouldn't be so keen on owning DDD stock if they didn't enter this small format space. Management is doing exactly the right thing. Did anyone predict when the first Apple PC came along that Apple will be where it is today? You sound like someone that would write a negative article about how useless a DOS PC would be to the world when PCs were first sold.
6. Finally, their accounting practice of how they account for acquisitions under GAAP is well established and an acceptable public accounting practice. No one says GAAP is perfect. No one ever says GAAP methods are the perfect accounting practice for all industry at all stages of their growth. To imply there is something nefarious about that is ludicrous Mr. House. Go pull up the current GAAP guide and spend your obviously plentiful free time to learn what is acceptable M&A accounting practices before you write any more articles on companies you know nothing about strategically.
Bottom line, DDD is in a growing industry and is a market leader. They are in the business of gobbling up as many patents and proprietary processes and sales channels worldwide as they can. They have real cash earnings growth and their expenses are in line (unlike for example MAKO which doesn't yet have their expenses in line despite purportedly acceptable top revenue growth). DDD is not MAKO. DDD can potentially be ISRG.
Disclosure: I am long DDD.