ExOne Company: What Investors Need to Know About Its Q4 Earnings Miss and 2014 Guidance

Shares of ExOne (NASDAQ: XONE  ) fell nearly 10% on Thursday after the industrial-focused 3-D printing company reported a huge miss on fourth-quarter 2013 earnings and provided 2014 guidance below analysts' expectations when it released results after the market closed on Wednesday.

First, the highlights:

  • Revenue fell 16% to $10.7 million, missing estimates of $12.1 million.
  • Earnings per share were negative $0.22 versus a $0.04 profit in the year-ago period, falling short of the consensus of $0.01.
  • Gross profit margin was 30.9%, down from 49% in the previous year's period.
  • Revenue mix was 66% printer sales and 34% PSC (production service center revenue includes revenue from services and materials).
  • 12 printing machines were sold, compared to eight in the year-ago period, as well as eight in the previous quarter.
  • Printer revenue fell 22%, due to the printer mix.
  • PSC revenue decreased 3%, due to capacity used to work on two sizable castings orders that will be delivered in the first half of 2014.
  • Guidance for 2014 was issued with a revenue range of $55 million-$60 million, below the consensus of $61.5 million, and an adjusted gross margin between 43% and 46%. 

Why revenue missed and earnings fell considerably short
The revenue miss should only come as a small surprise, as in mid-January, ExOne lowered its 2013 revenue expectation to a range of $40 million-$42 million, below its prior guidance of $48 million. That implied fourth-quarter revenue of $11.2 million-$13.2 million, whereas quarterly revenue came in at $10.7 million, and annual revenue at $39.5 million. These numbers only slightly missed the lower end of the stated annual and implied quarterly guidance ranges. One would expect, however, that ExOne would have at least met the lower end of the ranges, given the quarter had ended a couple weeks prior to ExOne's revenue preannouncement. 

At the time of the preannouncement, the company cited delayed approvals for foreign sales of four systems as the reason for the anticipated revenue shortfall. ExOne stated that it expected to book these orders in the first half of 2014 -- and that expectation was reiterated on the company's conference call. So this still seems to be just a case of revenue shifting.

The primary reasons for the considerable earnings miss were the unfavorable printer mix and higher fixed costs. While the company did sell 12 printers in the quarter, three of them were X1-Lab systems, which are small, lower-priced systems that customers use for R&D. So, the actual number of production systems sold was nine, just one more than in the previous period's quarter and in the trailing quarter. Further, not as many of the large-capacity, higher-end S-Max systems were sold. The breakdown of the eight systems sold in the quarter was three S-Max, one S-Print, and five M-Flex, whereas in the prior year's quarter five S-Max and three S-Print systems were sold. ("S" is for "sand," with the S-Max and S-Print comprising the company's sand casting line while "M" is for metal.) 

While the S-Max/S-Print sales mix wasn't favorable, the positive news is that five M-Flex systems were sold in the quarter, which makes six M-Flex sales in 2013. This system, which prints directly in metals (specifically, stainless steel, bronze, or tungsten), was rolled out in the fall of 2012, so these sales seem to reflect positive initial acceptance in the marketplace. As I recently wrote, the metals 3-D printing space is the place to be in 2014 and beyond. And, in fact, ExOne expects to triple it sales of M-Flex systems in 2014.

Given the company's small size and lumpy quarterly sales, it's best to look at the full-year picture. Here's how the printer sales breakdown by type over the last three years: 

Printer Type  2013         2012             2011     
S-Max 13 9 1
S-Print 3 3 1
S15 (refurbished) 1 1 2
M-Flex 6 -- --
X1-Lab 5 -- 1
Micromachinery 1 -- --
Total 29 13 5

Source: ExOne.

Investors need to remember the company is small and young
ExOne is considerably smaller than the industry's two biggest players; it has a market cap of $567 million, whereas 3D Systems and Stratasys have market caps of $6.2 billion and $5.6 billion, respectively. Additionally, it's a much newer public company, as it just went public in February 2013. So, it's to be expected that ExOne's quarterly revenue will be quite "lumpy" for awhile, and that its revenue and earnings in its first few years of being a public company will be difficult to estimate. ExOne sells pricey machines -- some are priced at more than $1 million -- so educating industrial customers as to the benefits of buying these higher-end 3-D printers to augment and/or replace their traditional manufacturing equipment shouldn't be expected to be a short-term process.

That said, the fact remains that ExOne has now missed analysts' estimates in every quarter since it's been public. This is likely a case of analysts expecting too much of this small and relatively new company. However, management also bears some responsibility for not being more conservative in its guidance, which it needs to start doing. And, in fact, CEO S. Kent Rockwell did state on the earnings call that management will indeed be guiding more conservatively.

2014 expected to be another "transition year"
ExOne expects 2014 revenue to increase 40%-50% to approximately the $55 million-$60 million range. The consensus estimate prior to going into earnings was $61.6 million. The company expects adjusted gross margin to be between 43% and 46%; this excludes the costs of facility expansions, anticipated to be $1.5 million-$2.5 million.

Further, ExOne expects 2014 SG&A (selling, general, and administrative expenses) to be in a range of $19 million-$21 million and R&D expenses to be in a range of $6 million-$7 million. Capital expenditures in 2014 are expected to be between $31 million and $34 million.

ExOne doesn't provide earnings guidance, which is prudent at this stage of the game. When questioned by an analyst during the conference call about earnings expectations, Rockwell did note that the company could turn a profit in 2014 if all proceeds according to plan, but he didn't state this as a definite. The consensus estimate for 2014 earnings per share is $0.25, though I'd expect analysts to lower this expectation due to ExOne's fourth-quarter results and 2014 guidance.

In short, Rockwell expects 2014 to be another "transition year." Starting in 2015 and 2016, the company anticipates it will begin receiving multiple printer orders from companies that are pleased with the single printer they have and plan to incorporate multiple systems into their mass production processes.

Foolish final thoughts
ExOne posted weak quarterly results. While there seems to be explainable reasons for these results, the company needs to start doing a better of job managing expectations.

There's no doubt that the industrials 3-D printing space -- and, in particular, the industrial metals space -- is an attractive one. ExOne's sales of five M-Flex systems in the quarter and anticipation of tripling M-Flex sales in 2014 is a good sign. However, it's too early to glean if the 2014 sales will pan out and whether this system will gain considerable favor in the marketplace.

If I were an investor, I'd be monitoring the company's progress in 2014 in selling more S-Max systems, looking for the company to hit its revenue and gross margin targets in 2014, and for it to come at least close to its goal of tripling M-Flex sales. 

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  • Report this Comment On March 21, 2014, at 1:38 PM, fibonacci4 wrote:

    Completely agree that analysts have NO CLUE what they are predicting...especially for such a young company in a new space with technology they certainly don't understand.

    I remain bullish long term until something technically is wrong or undesirable with XONE's products.

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