2 Critical Takeaways From 3D Systems' Q3 Earnings Call

3D Systems Corporation (DDD) reported its third-quarter 2016 results on Thursday, Nov. 3. The diversified 3D printing company's year-over-year revenue increased 3.2%, to $156.4 million. GAAP loss per share narrowed to $0.19 from $0.29 in the year-ago period, while adjusted earnings per share jumped to $0.14 from $0.01 in the year-ago period.

Though the report contained some bright spots, including in healthcare and materials, 3D Systems continued to struggle to grow 3D printer revenue -- it declined 6% year over year in the quarter -- due to the slowdown in demand for enterprise 3D printers that began in early 2015, which has also affected its rival, Stratasys. 

Earnings releases usually don't provide much color about a company's performance or future prospects, but management often shares a wealth of information in the analyst conference calls following these releases. Here are two key topics that you should know about from 3D Systems' Q3 call.

Image source: 3D Systems.

1. Reprioritizing resources by exiting certain products and projects

From CEO Vyomesh Joshi's remarks:

To better focus on the opportunities we see, we are taking decisive steps to prioritize our portfolio and resources. In line with this, we are exiting certain products and projects, including CubePro, CubeJet, the ProX 400 and our high-speed continuous jetting printer known as Project Atlas. We are redirecting resources from these projects to advance and accelerate next-generation capabilities in metal printing as well as Figure 4.

As to the 3D printers that Joshi said are being discontinued, the CubePro is a desktop model aimed at professional users, the CubeJet is a higher-end consumer desktop model, and the ProX 400 is an enterprise-focused direct-metal 3D printer. Project Atlas refers to the high-speed 3D printing racetrack platform that 3D Systems was initially developing as partner to Alphabet's Google on Project Ara. After Google decided in late 2014 not to use 3D printing in Project Ara to produce customized components for modular cellphones, 3D Systems had said it still planned to go on with the platform's development. 

Pulling the plug on the entire Cube line is long overdue, in my view, as the consumer market just is not ready for prime time. 3D Systems discontinued its entry-level consumer model, the Cube, in December 2015. I'd venture to guess the ProX 400, launched in late 2014, is being discontinued because it likely had quality and performance issues. Throughout last year, 3D Systems experienced quality and performance issues involving several nylon and metal 3D printers. 

Joshi mentioned that the company will be redirecting resources into advancing its metal 3D printing line and Figure 4. Figure 4 -- which was introduced earlier this year, but is still under development -- is a robotic, modular, stereolithography (SLA) 3D printing system designed for the production of plastic parts. It's a key component of 3D Systems' strategy to capitalize on 3D printing's shift from being a primarily prototyping technology to one that's used in more manufacturing applications. The company claims that Figure 4 is up to 50 times faster than conventional SLA 3D printing systems. 

This redirecting of resources is a good plan, in my opinion. It remains to be seen how well the company will execute, as it has struggled in the execution department for quite some time. To be fair, however, the execution issues were under the former top management team: The company's CEO and CFO are both new in 2016. 

2. The state of the metal 3D printing business 

Here's what Joshi said when an analyst asked, "[W]hat is your metals revenue currently or what level could it be in 2017?"

So, we don't break down our metals revenue. But I do believe metals is a very big opportunity. ... GE's entry [into the 3D printing supply business via bidding for two European metal 3D printing companies, one of whose bid has been accepted at this point] validates that this is a very important market. With our ... 300 and 320 [ProX 300 and ProX 320 are direct metal 3D printers, launched in December 2013 and January 2016, respectively], we have a very unique technology.

The analyst followed up by asking Joshi if it was fair to say that the metals business was "still sub 10%" of the company's revenue. Joshi declined to answer, so I think it's probably safe to say that it does still account for less than 10%. If it had grown to be greater than this -- we know it accounted for about 6% of total revenue in 2014 -- Joshi probably would have been happy to point this out.

After its move into metal 3D printing via its July 2013 acquisition of Phenix Systems, 3D Systems initially provided growth and total revenue updates on its metals business in its quarterly earnings reports. Early progress was encouraging, with the company's 2014 metal-printing revenue growing 175% on a year-over-year pro forma basis, to $39 million, or about 6% of total 2014 revenue.

Last year, 3D Systems experienced quality and performance issues with its metal 3D printer line. Perhaps not surprisingly, management stopped providing updates as to how the metal 3D printing business was performing. One can't blame the new top management team for playing their cards close to their chest for now, but investors and potential investors should expect at least a little color on the metal 3D printing business in the next quarter or two. When the company reports Q4 results in late February or early March, Joshi will have been CEO for just shy of one year. 

Show me the money!

In short, 3D Systems appears to be making some positive changes, and there were some bright spots in the Q3 report, but in order for the company to remain a dominant player in the 3D printing industry, investors eventually need to be demanding -- as per the iconic line from Jerry Maguire, with a twist -- "Show me the money from 3D printer sales growth!"