Investors Are Not Happy With 3D Systems’ Outlook

3D Systems (NYSE: DDD  ) may have released results for 2012, but investors are punishing the stock for 2011 and 2013. If that is as puzzling as it sounds, then keep reading. After digesting results released Monday morning, investors will find that the growth trend continued in 2012. While there is no denying that the company will grow for the foreseeable future, there are valid concerns surrounding the source and pace of growth. Are analysts and investors building up expectations to unreasonable levels? Let's examine a few areas that require some caution moving forward.

To the moon!
Here is how 3D Systems left 2012 in the dust:

 

4Q11

4Q12

2011

2012

Revenue

$69.9 million

$101.6 million

$230.4 million

$353.6 million

Gross Profit

$32.9 million

$52.6 million

$109.3 million

$181.4 million

Operating Expenses

$16.8 million

$28.2 million

$63 million

$99.8 million

Net Income

$13.8 million

$22.6 million

$41 million

$67.9 million

Diluted EPS

$0.27

$0.39

$0.81

$1.25

Source: SEC filing  

It's quite obvious that the company crushed 2012 by moving forward in all key areas. New product revenue – a key driver of growth – leaped to $131.9 million from just $77.8 million in 2011. Acquisitions weren't the only means of growth either, as organic revenue growth jumped 22.4% compared to 19.2% last year. If we can believe it, that is (see below).

Another relief for investors is that 3D Systems is continuing to increase its gross profit margins across the board:

 

2011 Gross Profit Margin

2012 Gross Profit Margin

Printers and other

37.4%

42.8%

Print materials

64.8%

68.2%

Services

41.1%

45.7%

Total

47.3%

51.2%

Source: SEC filing  

As I mentioned above, however, the results from 2012 are not the point of contention for investors. 

A haunting past? It's complicated
Shares stumbled out of the gates after earnings were released and fell even harder during the conference call. The reason? An analyst pointed out an error of unknown origin in the earnings presentation regarding the company's stated organic revenue growth. A simple graph comparing the category in 2012 to the year ago periods certainly doesn't add up to what the company reported last year.

The new presentation states that organic growth in the fourth quarter of 2011 was 8.8%, while the company's conference call transcript last year stated it was 19%. Ironically, the full-year number presented in the graph today was the same that was reported in the 2011 filing referenced above, also at 19%.

Looking back at the reported organic revenue growth for the remaining three quarters of 2011 raises more questions. From the first quarter onward, 3D Systems stated growth of 23%, 25%, and 12%, respectively. It would be reasonable to expect the fourth-quarter totals for a quickly growing company such as 3D Systems to be weighted more heavily than the preceding quarters. So how does the reported organic growth figure for the fourth quarter of 2011 drop from 19% to 8.8% while the full-year figure remains the same?   

Is it possible that the company's acquisition accounting principles are so complicated even it cannot accurately trace revenue sources? Its actually a simple process, so maybe the company really did just report the wrong numbers by accident. There is certainly some explaining to do. Unfortunately, since the company does not report actual organic revenue totals, just percentage changes, investors may never know what really happened. Let's just hope it does not continue to be an issue in the future.

Outlook gut check
Accounting discrepancy aside, the company's fourth-quarter earnings per share of $0.39 beat estimates of $0.38. And although quarterly revenues of $101.6 million missed the mark of $103.86 million it wasn't by a wide margin. All systems go, right?

Disappointment enters when investors glance at the company's outlook. Although 3D Systems is calling for 2013 revenue between $440 million and $485 million and split-adjusted non-GAAP EPS between $1.00 and $1.15, analysts had profit margins pegged much higher. Before the call, expectations were for revenue of $442.2 million supporting an EPS of $1.05. While 3D Systems did guide higher than estimates it appears that due to the high valuation of company, Mr. Market was craving even juicier guidance.  

Is it time to panic?

Huge growth never comes cheap
Investors will need to adjust their own expectations for the company accordingly, but we Fools never prescribe panicking as a remedy for coping with uncertainty. I asked if investors were getting a little carried away with the 3-D printing industry and throwing inhibitions to the wind last month. Without making any novel conclusions, I simply noted that it would be awfully difficult for the company to grow at the expected 45% per year through 2016.

The high current P/E and forward P/E will be keeping me away from considering the company, but not everyone agrees. Anders Bylund recently pointed out that huge growth never comes cheap. In fact, our Rule Breakers newsletter thrives upon that idea. Fool co-founder David Gardner even likes it when companies are labeled "overvalued." You may think he's crazy, but as an early investor in Amazon and AOL, David has witnessed some crazy returns by taking a long-term view.

Foolish bottom line
No one, including myself, is questioning that the company is growing, but people are beginning to question how quickly and from which sources. Of course, the company has no control over the attainability of analyst expectations. All it can do is continue to push into new markets, strategically consolidate the industry, and help lead the 3-D printing industry to maturity. What do you think about the company's earnings? Let me know in the comments section below.

With the U.S. relying on the rest of the world for such a large percentage of our goods, many investors are ready for the end of the "made in China" era. Well, it may be here. Read all about the biggest industry disrupters since the personal computer in "3 Stocks to Own for the New Industrial Revolution." Just click here to learn more.

*Editor's note: A previous version of this article misquoted Wall Street's EPS expectations for 2013 as $1.58; this was the value before the stock split, and EPS has been adjusted to $1.05 to reflect the stock split. Also, a previous version of this article referred to the company's SEC filing, whereas it should have referred to the company's conference call transcript. The Motley Fool regrets the errors.


Read/Post Comments (16) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 25, 2013, at 12:32 PM, phxmike wrote:

    If the $1.58/share analysts expected for earnings is pre-split, then adjusted that is $1.05/share which puts them right on target.

  • Report this Comment On February 25, 2013, at 12:41 PM, DigitalMediaView wrote:

    Regarding the very concerning analysis of the accounting discrepancy, because it's an issue with one of the most critical questions facing the company, organic growth vs. growth by acquisition, this is a huge red flag. Given how pro-DDD Fool has been lately, it is a credit to your integrity that you hit hard on this issue.

  • Report this Comment On February 25, 2013, at 12:43 PM, veryst wrote:

    I am purchase more shares today at $32.4. Thanks this monday for that.

    See you in the future.

  • Report this Comment On February 25, 2013, at 1:09 PM, leviek wrote:

    While I do have respect for Motley Fool and the research made herein, I am very shocked that your article is dreadfully wrong in one of the most important areas, DDD guidance for non-gap earnings for 2013.

    You stated an estimate for $1.58 for 2013 and the company guided for $1.00 to $1.15. The $1.58 is an estimate for prior to the 3 for 2 split adjustment while the $1.00 to $1.15 is an estimate post split. That means the company is guiding for $1.50 to $1.725 pre-split non-gap EPS, or a mid-range of $1.615 and is probably being cautious. How is that a miss.

    You stated that the company's guidance for 2013 is subatantially lower than the street's $1.58.

    How could you print such a mistatement, especially as Motley Fool is generally very positive about DDD and the industry. Please check your very large error and print a retraction.

    I'm a fanancial advisor and it never ceases to amaze me when analysts get it so wrong.

  • Report this Comment On February 25, 2013, at 1:21 PM, leviek wrote:

    Sorry for the misspellings on my previous comment. The comment page has no way of quickly checking for spelling or editing. You need to fix that; however, I'm still sitting here wondering how someone in your position could make such a glaring error, especially considering that the Motley Fool is a champion of 3D printing in general and DDD pretty much met,or exceeded, all future growth expectations with their $440 to $485 million sales estimate and their $1.50 to $1.725 pre-split non-gap earning's estimate.

    It's mistakes like this that cause the street to be confused. Please adjust and correct your major error.

  • Report this Comment On February 25, 2013, at 1:37 PM, lynmar79 wrote:

    Mr. Chatsko, are you responsible for this misinformation? I think you need to issue a correction/retraction immediately. This is from theflyonthewall:

    Three dimensional printer maker 3D Systems (DDD) is well off its lows of the day after the company provided fiscal 2013 earnings per share guidance that may have confused some investors. 3D Systems executed a three-for-two stock split on Friday. If the stock had not split, the company said that its fiscal 2013 EPS guidance would have been $1.50-$1.73, versus analysts' consensus estimate of $1.58. If the split is factored in, however, the company fiscal 2013's EPS guidance was $1.00-$1.15. Some investors may have compared the company's post-split guidance to the pre-split consensus estimate. As a result, they may have erroneously believed that the guidance was much lower than expected. In early afternoon trading, 3D Systems fell $2.25, or 6%, to $35.70. The stock reached a low of $30.28 this morning. Stratasys (SSYS), another three dimensional printer maker is also falling significantly, losing 4.5% to $64.30.

  • Report this Comment On February 25, 2013, at 1:38 PM, durango58 wrote:

    Ditto to the above.

  • Report this Comment On February 25, 2013, at 1:49 PM, lynmar79 wrote:

    Maxx Chatsko's entire premise for his article is incorrect. Doesn't TMF's have an editor that checks for mistakes? How many investors saw his article and sold? Why hasn't TMF's taken action to correct this mistake? it makes one wonder.

  • Report this Comment On February 25, 2013, at 1:56 PM, TMFBos wrote:

    Thanks for catching the error everyone. We apologize for the error and will get it fixed as soon as possible.

    Thank You,

    Blake Bos

  • Report this Comment On February 25, 2013, at 2:20 PM, leviek wrote:

    It is interesting to me that investors can quickly catch the ridiculous statements analysts make. If Mr. Chatsko was more involved, and aware, of the company HE follows, he would know better than to print such a, sorry to say, stupid report. This report had an effect on the market for DDD stock in the AM, a very substantial effect.

    Mr Gardner....Motley Fool gets a big black eye for dumb analysis. I've been a member for quite some time and have been in the business of investing since 1964 but this analyst really blew it!!!

  • Report this Comment On February 25, 2013, at 2:33 PM, lynmar79 wrote:

    leviek, you're spot on. I'm stunned that a mistake of this magnitude took place. I'd also like to know if an editor signed off on the accuracy of the thesis? If an editor didn't approve this article, you have to wonder if TMF's has a system of checks and balances in place. They did a disservice to TMF's subscribers and the investment community at large. The damage is done, and there appears to be no rammifications for this mistake. Oh well, it's only our money.

  • Report this Comment On February 25, 2013, at 3:17 PM, TMFBlacknGold wrote:

    Whoa my mistake everyone. I was using the NASDAQ site below which used split-adjusted EPS from the company's guidance with uncorrected analyst expectations - which is why no one caught it. I certainly wasn't trying to mislead anyone, but I guess it does take the steam out of the outlook section above:

    http://www.nasdaq.com/article/3d-systems-q4-profit-up-63---q...

    Guess that's the drawback of trying to provide a super-quick article. I'll admit that the big drop added some pressure for the timeliness.

    My apologies.

    --Maxxwell

  • Report this Comment On February 25, 2013, at 3:25 PM, TMFBlacknGold wrote:

    @lynmar79,

    Don't give me too much power! The share price recovered quite rapidly from -20% and well before the article went live. If you read my comment above you'll see that I wasn't the ultimate source of the error (still doesn't mean I get off the hook).

    Fool on everyone!

    --Maxxwell

  • Report this Comment On February 25, 2013, at 3:29 PM, TMFBlacknGold wrote:

    The article went live at 12:12 pm to be exact. Right before the stock hit a daily high, actually.

    --Maxxwell

  • Report this Comment On February 25, 2013, at 4:05 PM, lynmar79 wrote:

    The article went live at 12:12 pm to be exact. Right before the stock hit a daily high, actually.

    --Maxxwell

    ....and then the stock price went down.

  • Report this Comment On February 25, 2013, at 4:07 PM, Blackthorn wrote:

    To say I'm becoming somewhat concerned is mild. It has not just been DDD, think of Nuance, Rackspace and other very recent volitile moves. Yes, that is a market function, up and downs, generally not in double digits in a period of days on well vetted companies. Maybe it's time to slow down on the deluge of new product offerings and hone the existing to perfection. Maybe whiiplash is a more appropriate word than concerned.

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