3D Systems (DDD 2.31%) released anemic third-quarter 2019 results after the market closed on Wednesday.
Shares of the 3D printing specialist closed down 4.6% in after-hours trading on Wednesday. The company beat Wall Street's estimates on both the top and bottom lines. So we can probably attribute the market's reaction at least in part to the soft fourth-quarter revenue guidance shared on the earnings call.
Here's how the quarter worked out for 3D Systems and its investors.
Image source: Getty Images.
3D Systems' key numbers
| Metric | Q3 2019 | Q3 2018 |
Change (YOY) |
|---|---|---|---|
| Revenue | $155.3 million | $164.5 million | (5.6%) |
| GAAP operating income | ($11.9 million) | ($11.0 million) | Loss widened by 8% |
| GAAP net income | ($16.8 million) | ($11.6 million) | Loss widened by 45% |
| Adjusted net income | ($4.5 million) | $2.4 million | N/A |
| GAAP earnings per share (EPS) | ($0.15) | ($0.10) | Loss widened by 50% |
| Adjusted EPS | ($0.04) | $0.02 | N/A |
Data source: 3D Systems. GAAP = generally accepted accounting principles. YOY= year over year.
If we exclude the impact of the entertainment business -- which the company divested in July -- revenue declined just 3.6% year over year. In the second quarter, revenue dropped 10.9% year over year, so the revenue decline decelerated in the third quarter.
Wall Street was looking for an adjusted loss of $0.05 per share on revenue of $151.1 million. So 3D Systems beat both expectations.
GAAP gross margin was 43.3%, down from 47.3% in the year-ago period and also lower than last quarter's 46.6%. Non-GAAP gross margin came in at 44.4%, down from 47.4% in the year-ago quarter and also lower than the second quarter's 47.4%.
During the quarter, 3D Systems generated $6.5 million of cash from operations and ended the period with $127.6 million of cash on hand.
Segment results
| Segment | Q3 2019 Revenue | Change (YOY) |
|---|---|---|
| Product | $94.5 million | (5.4%) |
| Service | $60.7 million | (6%) |
| Total | $155.3 million | (5.6%) |
Data source: 3D Systems. YOY = year over year.
Here's how key categories performed:
- 3D printers (within product): Revenue declined 17.2% year over year to $30.4 million.
- Healthcare solutions: Revenue rose 6.3% to $56.4 million. Excluding the impact of one large enterprise customer's order patterns, revenue increased 15%. (This category spans both segments and overlaps other categories.)
- Materials (within product): Revenue edged up 2.8% to $41.4 million.
- Software (within product): Revenue was approximately flat with the year-ago period at $24.6 million.
- On-demand part manufacturing (within service): Revenue fell 12% to $23.1 million.
The decline in 3D printer revenue was driven by "timing of large enterprise customer orders and the softer macro industrial environment," according to the earnings release.
For context, last quarter, 3D printer revenue dropped 27% year over year, healthcare revenue fell 8%, materials revenue declined 9%, software revenue edged down less than 1%, and on-demand manufacturing revenue declined 12%.
What management had to say
Here's what CEO Vyomesh Joshi had to say in the earnings release:
Despite continued headwinds in the industry, we achieved modest growth in Materials and Healthcare this quarter, driven by customer demand for our core and new product solutions. We remain focused on cost reductions, cash generation, and profitability in the near-term and driving long-term growth with the opportunities we have in our product portfolio and target markets.
And this is a don't-miss quote from Joshi from the earnings call: "We are confident that we will ramp up our metal factory system solutions by the end of the first quarter of 2020." The company paused the shipping of these products a couple quarters ago because it experienced some quality issues.
Looking ahead
3D Systems turned in another weak quarter. One positive worth mentioning is that growth -- albeit quite modest -- resumed in the materials business, just as management had been asserting for some time that it would. Growth in this category is particularly important because materials have high profit margins.
On the earnings call, CFO Todd Booth gave Q4 revenue guidance: "Looking at the fourth quarter, given the ongoing macroeconomic challenges and persistent headwinds that we have been facing, we are expecting mid-single-digit sequential revenue growth." [Emphasis mine.]
He also said that management expects non-GAAP, or adjusted, profitability in the first half of 2020.
