What to Expect When 3D Systems Corporation Reports Q1 Earnings

3D Systems (NYSE: DDD  ) is slated to report its first-quarter 2014 earnings on Tuesday, April 29, before the market opens. Investors in the entire 3-D printing space will likely be watching the company's earnings, given 3D Systems is the largest company by market cap in the sector, so often thought of as a bellwether. It's likely the stock will react more strongly than usual to an earnings' miss or beat, given 2014 hasn't been kind to the sector's stocks, and many investors are jittery. 

If you know what expectations are before earnings are announced, you'll be better prepared to make good decisions if an earnings announcement throws investors a curveball. So, let's take a look at analysts' expectations, and what to focus on when 3D Systems reports.

Analysts' Q1 EPS Estimate

$0.15

Change From Year-Ago EPS

-29%

Q1 Revenue Estimate

$145.5 million

Change From Year-Ago Revenue

42.5%

2014 Revenue Estimate

$701.1 million (representing 36.6% growth)

2014 EPS Estimate

$0.81 (a -4.7% change from 2013)

Data source: Yahoo! Finance

If you follow 3D Systems, you know why consensus estimates for both Q1 and full-year 2014 earnings are lower than the company's earnings for these respective periods last year. Briefly, 3D Systems plans to sacrifice short-term profits for spending on activities aimed at fueling long-term growth and capturing market share, as it announced earlier this year.  

With that said, other than the usual headliner numbers, here's what investors should key in on in 3D Systems' earnings report:

Growth in the metals 3-D printer business
If 3D Systems' results this quarter, or in the periods going forward, exceed expectations, the company's metals 3-D printers business will likely be one of the main reasons.

The company generated $14.3 million of revenue from its direct metal printing systems in 2013. This represented a very small portion of its overall revenue, simply because 3D Systems only recently acquired metals printing capabilities when it bought Phenix Systems last summer. Phenix makes 3-D printers that use laser sintering technology.

During last quarter's conference call, CEO Avi Reichental forecasted a turbocharged ramp-up in revenue from this business:

Metals is in the beginning stages of what we believe is a very exciting journey. As we have said repeatedly now, we have been sold out of capacity every quarter since we acquired this business [Phenix] and we expect that this year it could generate some place between $25 million and $50 million in revenue and it's just the beginning.

In other words, Reichental believes the company's metals business could nearly double to quadruple in one year. I don't think this is just a case of a CEO being overly optimistic. As I wrote in, "Why the Metals 3-D Printing Space is the Place to Be in 2014," there's every indication that demand for 3-D printers that can print in metals is "on the cusp of an incredible growth trajectory."

Investors should home in not only on the revenue generated from the metals 3-D printer business, but also on any indication that 3D Systems could win multiple systems orders from General Electric or other industrial giants. GE was testing 3D Systems' last year for possible inclusion in its planned capacity ramp-up. Any such indication could mean the metals business will perform even better than 3D Systems is expecting, and help fuel better than expected overall results.

Margins
Investors should watch margins across the board. That said, it's to be expected that margins will vary a bit from quarter to quarter, especially for an acquisitive company such as 3D Systems, which is frequently bringing new companies into the fold. So, I'd not place too much importance on any single quarter, and think it's best to compare to the company's trailing-12-month averages, rather than the prior year's period. 

3D Systems' gross, operating, and net profit margins, for the trailing-12-month period, are 52.1%, 15.8%, and 8.6%, respectively. 

New entrants are entering the 3-D printing space, largely because of patent expirations, so investors should monitor gross margins to see if these new entrants are putting pressure on the company's average selling prices. We know 3D Systems' operating and profit margin will be under pressure, given the company is increasing its spending on activities intended to power long-term growth. 

A historical look at operating and profit margins might prove helpful, so here it is: 

DDD Operating Margin (TTM) Chart

Data by YCharts

2014 guidance
3D Systems expects 2014 revenue in the range of $680 million to $720 million, and adjusted earnings per share between $0.73 and $0.85. It issued this guidance when it preannounced its 2013 results earlier this year, and reiterated these expectations when it released its fourth-quarter results.

The analysts' consensus for revenue of $701.1 million falls right at the mid-point of the company's revenue guidance range, while analysts are expecting adjusted EPS of $0.82, closer to the high end of the range.

I'd not expect 3D Systems to bump up (or down, for that matter) its guidance just four months into the year, but it certainly would be a considerable positive if it did.

Don't sweat the consumer segment results
The amount of press that the consumer segment of the 3-D printing sector gets far outweighs its importance from a business standpoint, in my opinion. Granted, from a consumer adoption standpoint, it's interesting to monitor sales in this category. However, I don't think investors need to pay any special attention to this segment, at least not at this time. The big money is being made in the commercial and industrial segments, and that should continue, in my opinion. 

3D Systems' consumer business is growing considerably faster than its overall business, which we'd expect, as it's small. Revenue in its consumer segment jumped 206% last year, while overall revenue grew 45%. It still, however, only accounted for 7% of total revenue. While 3D Systems is naturally focused on growing this business, I view it as a plus that it's a small portion of the company's total business. That's because there will almost surely be more price competition -- and hence, margin contraction -- in the consumer category than in the commercial and industrial spaces. 

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