Breaking Down Arcam AB's Q1 Earnings -- FastEBM and New Orders

The Q10. Source: Arcam AB

Swedish industrial metals 3-D printing company Arcam (NASDAQOTH: AMAVF  ) reported very solid first-quarter 2014 earnings before the Stockholm exchange opened today, and it followed up with its first ever conference call at 8:00 a.m. EST. Arcam, which sells its electron beam melting 3-D printing systems to the orthopedic implant and aerospace markets, is the first company in the highly volatile 3-D printing sector to report first-quarter results.

Investors clearly liked the results, as Arcam's stock is up 10% in over-the-counter trading in the United States as we near the market's close. (Arcam is listed on the Nasdaq OMX Stockholm, but it also trades OTC in the U.S.) 

Arcam's Q1 results 
First, here are the highlights: 

  • Revenue increased by 70% to 64.9 MSEK (million Swedish Krona), or about $10.0 million.
  • The bulk of the revenue growth was organic, as the company's Advanced Powders & Coatings acquisition accounted for just 5% of the quarter's revenue. AP&C is a titanium powder manufacturer.
  • Net profit rose to 3.6 MSEK up from 0.1 MSEK in the year-ago period, which includes 6 MSEK in costs associated with the acquisition of AP&C.
  • Earnings per share jumped to 0.20 MSEK, or about $0.03, up from 0.01 MSEK.
  • Profit margin was 5.5% based on GAAP results, and 14.8% on an adjusted basis.
  • Seven electron beam melting systems were delivered, versus four in the year-ago period.
  • Six orders for EBM systems were received in the quarter, the same number as in the year-ago period.
  • Backlog at the end of the quarter was 11, versus 12 at the end of the first quarter of 2013.

These are very solid results, which investors should be happy with, especially given the huge stock price drops that have taken place in the volatile 3-D printing sector in 2014. While Arcam's stock is up 10% to $29.60 as I type, it's still far from its one-year high of $50.25. Part of the pummeling the group has taken can be attributed to market sentiment largely turning against highly valued, high-growth "momentum" stocks, though fundamentals are also at play, as the sector's results for the fourth quarter of 2013 were subpar for such highly valued stocks.

The first quarter of 2014 involved Arcam moving back into the right direction in terms of profitability, as the company's profit margins decreased somewhat from 2012 to 2013. Arcam's profit margin for the first quarter was 5.5%, though that number jumps to 14.8% if we exclude the non-recurring costs associated with its AP&C acquisition. Its profit margin in 2013 was 10.2% on an adjusted basis, and 7.7% on a GAAP basis.

Forward guidance
Arcam doesn't provide revenue or earnings guidance, which is common for smaller companies selling relatively few numbers of high-end products. This is because it's very difficult to get an accurate handle on sales projections because of the quarterly "lumpiness" factor. Fellow high-end industrials-focused 3-D printer maker ExOne, likewise, doesn't provide earnings guidance, though it does provide guidance on the revenue side.

CEO Magnus Rene did state that 2014 results "will increase" (as compared to 2013), so we know we can expect continued growth. An analyst on the call tried to pin him down to revenue growth expectations. Based upon that exchange, it's safe to say we probably can't expect to see 70% revenue growth for the entire year. 

Arcam delivered 25 EBM systems in 2013 and 15 in 2012. In response to a question, Rene stated that the company's production capacity -- it has considerably beefed up staff -- is now in the 40-50 range. So, Arcam currently has capacity for considerable growth. 

Arcam's recent order intake numbers have been a bit concerning, as the company received six orders in the first quarter, which was the same as in the first quarter of 2013, and 10 orders in the fourth quarter of 2013, which was down two orders from the previous year's period. Rene stated on the call that he expected the order rate to accelerate. He's usually conservative, so I think investors should feel assured, here, that this will prove to be the case. 

Key takeaways from conference call
It's a big positive for investors that Arcam has started having conference calls, and this fact will also certainly help me provide readers with better analysis.

Here's what I view as two of the biggest takeaways from the call:

1. FastEBM project results will be incorporated into new systems in one year
The goal of Arcam's FastEBM project, which received funding from the European Union, is to increase the speeds of its 3-D printers. The findings from this project will be incorporated into Arcam's new systems going forward. This is a key project, as speed is one critical hurdle that must be jumped before 3-D printing will make increased inroads in manufacturing beyond just small-run production applications.

Rene has been quoted as saying he believes speeds could easily increase by a factor of 10, though that's a longer-term goal. The good news is that Rene projects that the project's initial findings will be incorporated into new 3-D printers in about one year. These systems are expected to have speeds at least two times faster than the company's current systems. 

EBM systems are already typically faster than 3-D printers that use laser sintering technology, the most common tech used in metals 3-D printing. So, increasing speeds by more than two times within a year should further put the speed advantage into Arcam's corner. That is unless, of course, laser sintering speeds increase, which they probably will, as 3D Systems, privately held EOS, and the other big players are surely working on zipping up their systems.

2. Arcam sees orders for multiple systems on the horizon
Rene seems confident that the company will receive "multiple orders" from at least one customer during 2014. While this wasn't stated as a sure thing, it sounds darn close.

I wrote about this topic last month in "Why the Metals 3-D Printing Space is the Place to Be in 2014":

Last week, Jefferies upped Arcam's rating to a "buy" from "hold," citing that it believed Arcam had a shot at receiving some large orders for metals 3-D printers. Jefferies noted that its checks indicated that "6-12 large industrial groups are in deep discussion with metal 3D printing companies on larger orders that will be integrated into existing production lines." The firm believes "GE, Stryker, JNJ, EADS, Airbus, BMW, Medtronic, and others are likely to place large orders in 2014." 

The Foolish bottom line
Arcam turned in solid results for the first quarter, and its long-term growth prospects continue to look bright. Despite the stock's considerable pullback in 2014, it still remains very pricey using traditional valuation metrics, so it's not a stock for the risk-adverse, or for those with shorter-term investing horizons. Investors with a long-term horizons, however, could be amply rewarded if Arcam's growth prospects continue to remain on track. 

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Read/Post Comments (7) | Recommend This Article (6)

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 April 17, 2014, at 10:19 PM, Janek805 wrote:

    Nice report Beth........the future appears bright for Arcam.......but the sooner FastEBM is incorporated, the quicker the multi-orders will come.

  • Report this Comment On April 18, 2014, at 6:00 AM, dharthoorn wrote:

    Thanks Beth for another well-written analysis.

    imho You are the best all-round expert on the Fool when it comes to 3D tech.

  • Report this Comment On April 18, 2014, at 2:01 PM, TMFMcKenna wrote:

    Jane and dharthoorn,

    Thanks. The entire 3DP space is interesting, though I particularly enjoy following Arcam, since it's little covered by Wall Street. (Heck, one or two of the big firms just started covering DDD and SSYS in Dec, so are well behind TMF!)

    Things should surely get even more interesting in this space in 2014.

    Beth

  • Report this Comment On April 21, 2014, at 10:37 AM, Janek805 wrote:

    Agreed, I think the 2nd half of this year will bring good news for Arcam shareholders. Without alot of fanfare, it appears to me that Arcam may be better positioned than any other 3D player in the industrial metal space from a pure production volume standpoint.

  • Report this Comment On April 25, 2014, at 5:03 AM, dharthoorn wrote:

    I think we can all agree on the fact that Arcam has a well-patented and cost effective 3D printing solution ready to roll out. The big question is, are their targetted markets ready for the big leap? We're still riding out the storm in the wake of 2008 and while some companies are willing to invest and innovate, others will choose to see what Arcam's competitors will bring to the tabble over 2014/15 rather than take big risks now.

    Not for entirely unselfish reasons, I hope companies will innovate.

    Dan

  • Report this Comment On April 25, 2014, at 3:25 PM, TMFMcKenna wrote:

    Very good point, Dan, as companies (and people) often defer big-ticket purchases when there might be something better (and/or less expensive) coming down the pike.

    Though, the beauty of being a small company, like Arcam, is that it will won't take many additional orders to really boost results. So, even if big companies take baby steps into incorporating 3PD into their operations, that would be good enough for Arcam to do well in the near term. That is, of course, if Arcam wins some orders.

    Additionally, while a million dollar piece of equipment is pricey, it's still a relative drop in the bucket for a huge company, like GE or J&J.

    I had a similar thought, but related to just Arcam. I'm wondering if some companies that are interested in buying Arcam systems will put off their purchases this year, knowing that considerably faster systems are expected to be out next year? I'd imagine Arcam might offer some potential buyers good terms on upgrades to entice them to buy now.

    I smiled at your last comment. Big difference between being selfish and self-interested, IMO, and everyone is self-interested.

    Beth

  • Report this Comment On April 28, 2014, at 6:10 PM, Janek805 wrote:

    Any idea if an old system can be retrofitted to become faster with better resolution when the company comes out with a new model? or do you have to buy a new system to get the speed update?

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