The world's largest pure-play 3-D printer manufacturer, 3D Systems (NYSE:DDD), reported third-quarter earnings on Tuesday, boasting unexpectedly high revenue growth in all segments. On the back of this excellent result, 3D Systems also raised its estimate for full-year revenue. At the same time, however, 3D Systems told analysts to expect lower profits for 2013 than it had previously forecast, dropping earnings guidance by about 13%. Initially this discrepancy spooked investors, sending stock prices dropping, until management explained why earnings would be lower than forecast. On the third-quarter earnings call, CEO Avi Reichental and other top executives revealed that earnings will be lower because the company is spending to invest heavily in its own manufacturing and sales capabilities to capitalize on what it sees as a big opportunity to create even greater long-term growth and value.
In the third of 2013, 3D Systems put up big numbers in all three of its operating segments, selling more printers, more print materials, and more print services than ever before. Sales of actual 3-D printers and other products provided the largest jump, growing sales at 76% thanks to strong demand in both the consumer and advanced manufacturing markets. On the consumer side, 3D Systems shipped over 6,000 printers, relatively inexpensive models mostly capable of printing in plastic. Progress in advanced manufacturing was less transparent, but we do know the company sold out entirely of its machines capable of printing in metal. Profitability in this business is purposefully low, with gross margins of about 45%, as 3D Systems is above all seeking to grow its installed base of printers so as to gain market share and build a user base that will buy the company's print materials.
Sales of print materials, the feedstocks 3-D printers need to actually print out anything at all, grew more modestly, only about 30%. Print material sales lag the sale of printers themselves, as it takes time for new 3-D printers to get delivered, installed, and put into production, but eventually the idea is for print materials like resins, bioplastics, and powderized metals to become the razors in 3D Systems' razor-and-blades model: Spend money to build a large base of installed 3D Systems printers, and then reap bumper profits when users need to refill their printers with raw material. 3D Systems has begun incorporating technical barriers like RFID chips in their printers to ensure new print materials come from 3D Systems itself, and that allows the company to run up huge margins in its print materials segment: Gross margin in the third quarter was a whopping 73%, improved from 67% in the third quarter of 2012. The huge profits the print materials segment boasts means that even small increases in sales make a big impact on the bottom line: In the third quarter, print materials generated just a quarter of overall revenue but a third of all earnings.
Print services also performed well, growing revenue by 37% in large part thanks to acquisitions of smaller print service providers. This business involves using 3-D printers to create parts and products for clients as needed. Until recently, it has been the largest driver of revenue as it allows customers to benefit from the advantages of 3-D printed parts without needing to invest in a 3-D printer or buy print materials. The segment has been a good marketing and market-building operator for 3D Systems, as it has introduced new users to 3-D printed objects, but ultimately margins will remain low because any purchaser of a 3D Systems printer can compete for the print services market.
Gotta spend money to make money
So with all this success, why did 3D Systems lower its earnings guidance? Because the company is seeing opportunities it's never seen before, and is spending money to "extend first-mover advantage in certain key verticals," a phrase Reichental delivered no less than three times on the earnings call. More specifically, 3D Systems is plowing money into sales and marketing to take advantage of buzz in both consumer and industrial circles around 3-D printing, doubling research and development spending to maintain technological superiority and introduce new products, and investing heavily in manufacturing capability to meet the needs of advanced manufacturing customers interested in printing with metal. Altogether, 3D Systems believes these initiatives will grow its market share as well as grow the overall market in 3-D printers and 3-D printed products. If you're bullish on the future of this nascent industry, as I am, 3D Systems' announcements should be taken as a prudent, disciplined and ultimately lucrative determination to dominate the industry in the long term, over a myopic focus on quarterly earnings beats. Today, I'm a happy 3D Systems investor.
Fool contributor Daniel Ferry owns shares of 3D Systems. The Motley Fool recommends 3D Systems. The Motley Fool owns shares of 3D Systems and has the following options: short January 2014 $36 calls on 3D Systems and short January 2014 $20 puts on 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.