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

Here's what 3-D printing investors need to know about Arcam's first-quarter 2014 results.

Apr 17, 2014 at 6:40PM
Arcam Q

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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Beth McKenna has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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