If you're following Arcam (NASDAQOTH: AMAVF), you may have already read the company's second-quarter 2014 earnings release. The Swedish industrial metals 3-D printing company kicked off the earnings season for the volatile group when it released its results last Friday.
Briefly, Arcam's revenue fell nearly 15% and its net income was down about 95%, largely because it only sold four of its electron beam melting systems in the quarter, compared to seven in the prior-year's quarter. You can read my article about the company's earnings here. Long-term investors, however, know that it's critical to look at the "whys" behind the numbers and focus more on the forward-looking prospects than the rear view picture. So, we're going to supplement the earnings data with some color provided during Arcam's conference call. There were too many valuable nuggets shared during the call to cover them all, but here are three biggies:
1. There were good reasons for the decrease in systems sold
This quote is from CEO Magnus Rene's prepared remarks:
There are actually three reasons behind the somewhat slow shipments. ... We have a lot of customers in China now and some of those customers that should have taken delivery in the second quarter couldn't because of customs formality reasons that are now sorted out, but weren't sorted out by the end of June. The second is planning. We had an unexpectedly strong order intake for the A2X system and we produce on forecast and we didn't forecast that strong of sales, which means that we have A2X orders that we could have shipped, but we couldn't because we hadn't built those machines. And finally ... We decided to delay the shipments of the Q20 systems for a few weeks to finalize quality assurance before we ship the first systems out.
The factors above didn't result in any loss sales, simply a shifting of sales to a future quarter. So, while Arcam took a hit this quarter on a year-over-year comparison basis, this scenario should be a positive in the second half of the year.
This brings us to the "lumpiness" factor. Placing too much emphasis on any single quarter is particularly short-sighted when we're dealing with a company such as Arcam, which sells a relatively few number of high-priced products. In such cases, even a shifting of one or two orders from one quarter to the next can result in a considerable difference in quarterly results.
Importantly, Arcam's results look OK for the first half of 2014. Revenue increased 21% to 110 million Swedish krona, or about $16.5 million. Net income decreased by almost 49% to 3.9 million Swedish krona, or about $583,600. But excluding the nonrecurring costs of 6 million Swedish krona associated with the acquisition of the AP&C metal powders business, net income rose 23% to 9.9 million Swedish krona, or about $1.48 million. Earnings per share dropped 56% to 0.21 Swedish krona, or about $0.03. Excluding acquisition costs, however, EPS increased 13% to 0.54 Swedish krona, or about $0.08.
Source: Arcam
Before we move along, investors should be familiar with the Q20 system. This system is based on Arcam's third-generation tech, and was just launched in December. It was designed for series production applications in the aerospace industry. The system's new features include increased productivity, higher resolution, and a camera-based monitoring system for part quality verification.
Given this is a new system, it's a big positive that Arcam took extra time on the QA end. Additionally, I think it's very likely that the Q20 was a big reason for the company's shrinking margin in the second quarter, though none of the analysts asked about this. Whenever a company launches a new product, there are increased costs involved, so the first few new products are costlier to produce than future products. Further, in the second quarter, Arcam was incurring the cost of producing its first several Q20s, but wasn't collecting the revenue from them, given that it held up shipments for QA reasons. So, I don't think investors need to concern themselves with the shrinking margin in the quarter. That said, if this situation doesn't right itself over the next couple quarters, there could be cause for concern.
2. The average selling price for systems was down due to the mix of systems sold
This quote is from Rene in response to an analyst's question:
The average selling price (for the first quarter) was extremely high ... and we said that you shouldn't take for granted that it should be that high always. I would say that if we look at the average selling price for the six months we are at, say, a normal level. So, it was higher in the first quarter and lower in the second quarter, and that's purely because of product mix.
This topic was a tad unclear. Rene did say that the average selling price was down "purely" because of the product mix, but he was referring to a comparison with Q1. I'd be interested to know if that "purely" holds true when we're talking about a year-over-year comparison with Q2 of 2013. Nonetheless, this is positive news; we just can't sure how positive. As to the mix, Arcam primarily shipped Q10 systems in the second quarter, whereas it heavily shipped A2X and A2XX (the precursor to the Q20) systems in the first quarter.
3. Arcam expects to ship "almost all" of its backlog in the second half of 2014
This quote is from Rene in response to an analyst's question as to whether the company expected to ship all of the backlog in the second half of the year: "Not all, but almost all."
Rene provided more information about this topic later in the call. Arcam doesn't expect delays in shipments due to any other reason than a customer might not want a system delivered right away.
The record backlog of 17 at the time of the conference call (backlog at the end of the quarter was 16) bodes well for Arcam's second half results. And given Rene stated elsewhere in the call that systems generally ship within three months of an order, there is more potential upside for shipments in the second half. Systems ordered in the third quarter should be able to be delivered in the fourth quarter unless, of course, a customer doesn't want the system delivered right away.
Foolish final thoughts
There seemed to be good reasons behind Arcam's weak second-quarter results. Additionally, it's important to use a wider time frame lens when looking at a company such as Arcam, and the six month picture looks OK.
Positively, Arcam is growing relatively moderately, and occupies an attractive niche (metal printing). Further, very early indications are that the aerospace industry is embracing Arcam's new Q20 platform. Given this is a higher-end system, this should bode well for future results.
Investors and potential investors need to remain focused on two factors: the order intake numbers and margins. A slowing in orders received could signal that one or both of Arcam's two markets (orthopedic implants and aerospace) are favoring other metals 3-D printing technologies over Arcam's EBM technology. And shrinking margins would likely indicate a loss of pricing power due to increased competition.
Note: Quotes were obtained by reviewing the call's recording, as a written transcript was not yet published. They should be very accurate, though a noncritical word or two may be off.
