3D Systems Stock Plunges 11% Upon Earnings Release: Here's What You Need to Know

3D Systems (DDD +4.67%) reported disappointing second-quarter 2017 earnings after the market closed on Wednesday. The diversified 3D printing company's revenue edged up about 1%, loss per share widened, and adjusted earnings per share declined 33% from the year-ago period. 

Shares of 3D Systems dropped 11.1% in after-hours trading on Wednesday, so the stock will almost surely be under pressure during the regular trading session on Thursday. We can attribute the market's reaction to both the weak second-quarter results and the company lowering its previously issued full-year 2017 guidance. The outlooks for both revenue and earnings were revised downward, with the latter more significantly reduced, which is likely what most displeased the market.

Image source: Getty Images.

3D Systems' key quarterly numbers

Data source: 3D Systems. GAAP = generally accepted accounting principles.

Revenue grew 0.9% year over year, but organic growth is lower than this figure. (Organic growth excludes the revenue contribution from acquisitions made within the last year.) In the first quarter, 3D Systems acquired Vertex Global's portfolio of dental materials, though it hasn't disclosed sales data. Based on rough sales ranges that CFO John McMullen provided on the first quarter's analyst conference call, it's probably safe to assume that year-over-year organic revenue was flat to slightly lower. 

For some context -- though long-term investors shouldn't place too much weight on Wall Street's near-term estimates -- analysts were looking for 3D Systems to post adjusted EPS of $0.12 on revenue of $162.5 million. So the company fell short of both expectations.

The company used $1.0 million of cash from operations and ended the period with $154.0 million of cash on hand. It remains in great shape from a balance sheet standpoint, as it carries no long-term debt. 

Gross profit margin inched down to 50.6% from 50.9% in the year-ago period. Research and development (R&D) expenses increased 17% year over year to $24.4 million, which contributed to the decrease in net income.

Segment results 

Data source: 3D Systems. *Total here adds up to $159.4 million, rather than the reported $159.5 million, due to rounding. 

The product category got a boost from the previously noted acquisition in the first quarter, so organic revenue declined more than 0.5%. Positively, service revenue increased nearly 3% -- while this is a modest increase, it's an improvement over the first quarter's result, which was flat with the year-ago period. 

The company said in the press release that "[d]emand from healthcare and industrial customers as well as strength in EMEA [Europe, Middle East, and Africa region] was offset by softer sales in APAC [Asia-Pacific region] and lower revenue from professional printers." More specifically, here's how key categories performed by year-over-year revenue changes in the quarter: 

• Healthcare solutions: up 25% to $49 million. This category spans both segments and overlaps other categories. It got a boost from the previously mentioned acquisition, which falls entirely within healthcare and specifically within materials.
• Software (within product): up 9% to $24 million.
• Materials (within product): up 8% to $44 million. This category also got a bump -- probably a big one -- from the acquisition.
• On-demand part manufacturing (within service): down 5% to $26 million.
• 3D printers (within product): down 14% to $28 million.

Healthcare, software, and materials continue to be growth drivers, as they were in 2016. Most concerning is the 14% year-over-year decline in revenue generated from 3D printer sales. As per my earnings preview, this metric is more important than it might appear because 3D printer sales are central to 3D Systems' razor-and-blade-like business strategy. Sales of 3D printers are the "razors" that drive a recurring revenue stream from sales of the higher-profit print materials, or "blades," over the life of the printers. 

Here's the more recent 3D printer sales picture: In 2016, revenue generated from sales of 3D printers dropped 21% from 2015, while they declined just 4% year over year in the first quarter of 2017. 

The company provided no information about Figure 4, its new speedy production platform, on the earnings call other than CEO Vyomesh Joshi reiterating that the platform will begin to add to the company's revenue in the latter half of this year.

Image source: 3D Systems.

What management had to say

Here's what Joshi had to say in the press release:

We are pleased with the growth in production printers [as opposed to professional 3D printers], materials, software and healthcare. However, we have work to do in the second half of this year to improve our execution across the company and position ourselves well for long term success and profitable growth in 2018 and beyond.

Joshi said on the earnings call that execution issues, rather than competition from new entrants HP Inc. and Carbon, were the reason for the company's results falling short of its expectations. Specifically, he noted that the quality and reliability issues centered primarily on the company's professional 3D printers and were deeper than he had originally thought. 3D Systems increased spending in the quarter to address these issues and plans to continue to do so.

Looking ahead

3D Systems lowered the upper range of its previously issued full-year 2017 revenue guidance and ratcheted back its earnings outlook. 

Data source: 3D Systems.

The company continues to guide for positive cash flow from operations for the year. It also expects to return to revenue growth in both on-demand 3D printing of parts and overall 3D printer sales for the full year.