3D Systems (DDD 2.59%) is set to report its fourth-quarter and 2014 results before the market opens on Thursday. Going into the report, the analyst community expects the 3D printing giant will grow revenue by nearly 31% year over year to $202.3 million, translating to $0.25 in earnings per share. Beyond the headline figures, investors should also focus on how 3D Systems' underlying business is performing to help determine whether the company's long-term investment thesis remains intact. The following areas will help investors assess how business fared at 3D Systems during the fourth quarter.
Organic growth and order backlog
In the third quarter, multiple execution issues forced the company to delay some of its revenue and miss earnings expectations. Specifically, the company continued to experience greater demand for its line of direct metal 3D printers than its manufacturing capacity could handle, and it also deliberately delayed the shipment of the consumer-oriented Cube 3 to improve the user experience. Although management has reassured investors that those execution issues have been largely resolved, pay close attention to the company's organic growth rate and order backlog, which together could provide further insights.
The thinking here is that if 3D Systems' execution troubles were the result of manufacturing constraints and shipping delays, and weren't due to structural issues with how its products have fared in the marketplace, it stands to reason that the company's order backlog would expand accordingly, as it did in the third quarter:
Source: 3D Systems' earnings results.
Considering the company's revenue tied to its Cube 3 printer contributes to its organic growth rate -- the rate of annual growth that doesn't account for acquisitions less than a year old -- it would also be reasonable to see 3D Systems' organic growth rate here underperforming recent quarters.
Source: 3D Systems' earnings results.
If the upcoming report demonstrates that 3D Systems' execution issues have meaningfully improved, investors will want to see these two trends reverse, with organic growth rising and orders backlog declining.
Gross profitability
In the third quarter, the company's total gross profit margin fell by 480 basis points year over year, which management attributed to a high concentration of product launches and the building out of its manufacturing capacity.
Between recent expiration of patents surrounding 3D Systems' stereolithography and selective laser sintering portfolio, and strong expected growth for the industry in general, the competitive landscape has intensified, which could invite pricing pressures that cut into profitability. In other words, investors should watch 3D Systems' gross profit margin for significant changes, which might indicate potential differentiation issues.
DDD Gross Profit Margin (Quarterly) data by YCharts.
Operating leverage
According to former CFO Damon Gregoire, the third quarter saw some restoration of 3D Systems' operating leverage, which the company defines as revenue growing faster than operating expenses. Ultimately, 3D Systems' management believes its operating leverage will be "fully restored" come 2016, and investors should expect revenue growth to outpace operating expenses growth during the fourth quarter.
DDD Total Operating Expenses (Quarterly) data by YCharts.
All eyes on Thursday
Come Thursday, investors will have an opportunity to focus on how the underlying business is performing to determine if 3D Systems' recent headwinds have been alleviated, and if the stock represents a long-term buying opportunity. Monitoring 3D Systems' organic growth rate, order backlog, gross profitability, and operating leverage is a great way to start the process.
