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3D Systems (DDD) Q2 Earnings Lag Estimates, Guidance Bleak

3D Systems Corporation’s DDD posted another huge earnings miss – its second after the last quarter’s huge miss ended its streak of three back-to-back quarters of impressive beats. The company reported adjusted loss (including share-based compensation expense) of 7 cents per share for second-quarter 2017, which was way below the Zacks Consensus Estimate of earnings of 6 cents.

Non-GAAP earnings came in at 8 cents per share, plunging 33.3% from the prior-year quarter figure of 12 cents, as modest top-line growth was more than offset by a rise in operating expenses.

In light of weaker-than-expected results, the company’s management tweaked the full-year 2017 guidance lower.

Inside the Headlines

The 3D printer maker reported revenues of $159.5 million, reflecting a year-over-year increase of 0.9%. Strong demand for the company’s healthcare solutions, along with steady demand for the industrial offerings was largely offset by lower revenues from professional printers. The company also saw growth in production printers, materials, software and healthcare revenues, but lower sales in APAC restricted top-line growth. Revenues missed the Zacks Consensus Estimate of $163 million by a small margin.

3D Systems’ Healthcare revenues were up 25% to $48.5 million year over year, primarily attributable to high demand for printers and materials from medical and dental customers. Software revenues totaled $24 million, up 9% on a year-over-year basis.

Materials revenue rose 8% to $43.9 million, thanks to strong production orders and robust contribution from the previously acquired Vertex-Global. The company’s Printer revenues were down 14% to $28 million, while on-demand manufacturing decreased 5% to $26 million.

In the quarter, gross margin contracted 30 basis points on a year-over-year basis to 50.6%. The company plans to drive further reductions in cost of sales from supply-chain betterment initiatives and manufacturing improvements, in order to drive margins higher.

In addition, the company’s operating expenses flared up (up 4%) to $87.5 million, as R&D expense rose 17% year over year, mainly on account of a rise in focused investments in production application solutions, including Figure 4, metals and materials.

Notable Developments

During the first quarter, 3D Systems had rolled out a next-generation additive manufacturing platform, based on the company’s Figure 4 technology and NextDent materials. The company believes that the new platform will bring down cost of operations, reduce fabrication times and produce far less material waste.

In the second quarter, 3D Systems launched the Simbionix SPINE Mentor, a hands-on simulated training and practice tool for minimally invasive spine surgeries. The company also released new products, materials and capabilities at RAPID + TCT 2017 to accelerate its leadership in plastic additive manufacturing.

3D Systems Corporation Price, Consensus and EPS Surprise

Products included the new ProJet MJP 5600, offering print speeds up to two times faster, a larger build volume, and part costs that are up to 40 percent less than competing multi-material 3D printers.The company also rolled out VisiJet CR-BK, a new rigid black plastic material for the ProJet MJP 5600 that enables producers to meet the most demanding product designs and models.

Also, during the quarter, 3D Systems and United Therapeutics joined forces to develop solid-organ scaffolds for human transplants. The multi-year collaboration will integrate 3D Systems’ profound healthcare printing and precision expertise with the regenerative medicine and organ manufacturing capabilities of United Therapeutics Corporation.

Cash Flow and Balance Sheet

3D Systems ended the quarter with cash and cash equivalents of $154 million, down significantly from $184.9 million as at Dec 1, 2016. At the end of June, net cash generated from operating activities came in at $18.4 million, significantly lower than the year-ago figure of $31 million.

Guidance

Concurrent with the second-quarter 2017 earnings release, the company revised its guidance for full-year 2017. 3D Systems now anticipates revenues in the range of $643–$671 million, which would reflect year-over-year growth of 2–6% in 2017 (earlier projection: $643–$684 million).

In addition, the company expects to report GAAP loss per share of around 14 cents for 2017 (compared to prior expectations of GAAP earnings of 2–6 cents per share), while non-GAAP earnings are now expected to be approximately 46 cents per share (earlier projection: 51-55 cents per share).

To Conclude

3D Systems’ year-over-year bottom-line improvements during second-quarter 2017 are attributable to a host of factors, including solid momentum of healthcare offerings, robust demand for production printers and materials, and higher efficiency in “demand manufacturing services”. We believe the acquisition of Vertex-Global Holding B.V will unlock multiple opportunities for the billion-dollar digital dentistry space.

The company is banking on continued double-digit growth in healthcare and sustained growth in software and materials to drive 2017 growth. Even on-demand manufacturing and printer revenues are likely to return to growth.

Also, the company’s efforts to streamline its cost structure by focusing on IT infrastructure, go-to-market and innovation are likely to stoke growth. In addition, the company remains bullish about the prospects of Figure 4 technology — the ultra-fast, modular Stereolithography system — designed for the production of plastic parts on the factory floor.

Despite these positives, 3D Systems’ broader market concerns have thwarted growth of the premium 3D printing company. The industry is battling a widespread decline in demand for enterprise 3D printers over the past two years. Other headwinds, including economic slowdown, inflation, currency fluctuations and commodity price vagaries, also marred the performance of most players in the industry.

3D Systems currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the same space include Lam Research Corporation LRCX, Applied Materials, Inc. AMAT and Advanced Energy Industries, Inc. AEIS. While Lam Research sports a Zacks Rank #1 (Strong Buy), Applied Materials and KLA-Tencor carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lam Researchhas an impressive earnings surprise history for the trailing four quarters, beating estimates all through, with an average positive surprise of 4.4%.

With four back-to-back earnings beats, Applied Materials has an average positive surprise of 3.4%.

Advanced Energy Industries has a decent earnings surprise history as well. The company surpassed estimates thrice over the trailing four quarters, with an average positive surprise of 11.3%.

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