Image source: 3D Systems.

On Wednesday, 3D Systems (NYSE:DDD) shares were up sharply after the company released its second-quarter earnings. The 3D printing maker reported that revenue fell 7% year over year to 158.1 million, which translated to a GAAP net loss of $0.04 per share and a non-GAAP profit of $0.12 per share.

Compared to the first quarter, 3D System's revenue increased modestly, by 3.6%. Although one data point is hardly a trend, 3D Systems' sequential revenue improvement may suggest the customer spending slowdown that's plagued 3D Systems since early 2015 is starting to stabilize.

Overall, 3D Systems' earnings had a number of bright spots and one major area of concern.

The big picture

During the second quarter, 3D Systems' materials, software, and healthcare solutions sales rose, which helped offset the impact of continued weakness from its core 3D printing hardware business.


Revenue (Thousands)

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Data source: 3D Systems.

Specifically, 3D Systems' printer sales fell 30% year over year, which seems to be an accelerated rate considering printer sales fell 17% year over year during the first quarter. Ultimately, falling 3D printer sales undermine 3D Systems' razor-and-blade model where 3D printer sales fuel the subsequent sale of materials, which tend to command higher margins.

However, it's worth calling out that 3D Systems' material sales rose 11.5% year over year, suggesting that utilization of its previously sold 3D printers is on the rise. In other words, 3D Systems' existing customer base appears to be finding more value and greater uses out of their 3D printers.

Gross margin rises as expenses fall

Across the board, 3D Systems' cost structure improved, which led to improved gross margins and lower operating expenses. Second-quarter gross profit margin increased 300 basis points year over year to 50.9% thanks to the company's shift away from the consumer 3D printing market and increased sales of higher-margin materials, software, and healthcare solutions.

Operating expenses fell 20.2% year over year to $80.4 million, primarily driven by lower amortization, stock-based compensation, and research and development expenses. The reduction in operating expenses narrowed its operating loss from $23.8 million last year to $3.7 million this year.

While it may not have been intentional, given the timing of previous expenses that didn't happen again, 3D Systems' improved cost structure plays into Vyomesh Joshi's -- 3D Systems' newest CEO -- strategy to drive profitable growth and create long-term shareholder value.

Image source: 3D Systems.

Cash on the rise

Despite reporting a net loss, 3D Systems generated $12.9 million in operating cash flow during the second quarter and ended with $176.2 million in cash on its books, an increase of $6.4 million from the first quarter. Through the first six months of this year, 3D Systems generated over $31 million in operating cash flow -- more than enough to cover the $7.6 million it simultaneously invested in capital expenditures -- money spent on factories, sites, and equipment to fund its future growth.

Final thoughts

At the end of the day, there were several positive aspects of 3D Systems' earnings to suggest that the company is making notable improvements in its business. However, its diversified business model masked the reality that its core business of selling 3D printers deteriorated further. Unfortunately, without a notable improvement in 3D printer sales, it's difficult to argue that 3D Systems' business is anywhere near making a full recovery.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.