As I opined in my 3D Systems (DDD +23.90%) earnings preview, "the 3D printing company had been having a challenging time trying to grow revenue before the COVID-19 pandemic, so it seems likely that its first quarter results aren't going to be pretty."
And pretty they were not, though all things considered, they weren't horrible.
Following the earnings release, shares dropped more than 14% on Thursday, while the market was flat. However, shares did gain back a little ground on Friday, closing up 5.2%.
We can attribute the market's displeasure largely to revenue coming in lighter than what Wall Street was expecting and the company projecting continued challenges stemming from the coronavirus pandemic.
Here's how the quarter worked out for the 3D printing company and its investors.
Image source: Getty Images.
3D Systems' key numbers
| Metric | Q1 2020 | Q1 2019 |
Change |
|---|---|---|---|
| Revenue | $134.7 million | $152.0 million | (11%) |
| GAAP operating income | ($18.2 million) | ($21.3 million) | Loss narrowed 15% |
| GAAP net income | ($18.9 million) | ($24.4 million) | Loss narrowed 23% |
| Adjusted net income | ($4.5 million) | ($10.1 million) | Loss narrowed 55% |
| GAAP earnings per share (EPS) | ($0.17) | ($0.22) | Loss narrowed 23% |
| Adjusted EPS | ($0.04) | ($0.09) | Loss narrowed 56% |
Data source: 3D Systems. GAAP = generally accepted accounting principles. Q1 2920 earnings results got a boost from a $3.2 million tax benefit.
Wall Street was looking for an adjusted loss per share of $0.05 on revenue of $140.6 million. So 3D Systems missed on the top line, and slightly beat on the bottom line. However, it only beat the bottom-line consensus estimate because it recorded a tax benefit of approximately $3.2 million, thanks to the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
For the quarter, GAAP gross margin was 42.4%, down from 43.2% in the year-ago period. Adjusted gross margin landed at 43.1%, down from 44.2% in the year-ago quarter. Gross margin held up relatively well.
During the quarter, 3D Systems used $2.3 million of cash in operations, and ended the period with $112.8 million of cash on hand. Last quarter, it generated $21.5 million of cash from operations, and ended the period with $133.7 million of cash. So, it burned through $20.9 million in cash during the first quarter.
Given its cash burn rate and its cash on hand, the company's cash position needs to be carefully monitored.
For context, in 2019, 3D Systems' revenue fell 8.5% year over year to $629.1 million. GAAP loss widened 49% to $0.61 per share, and the company posted an adjusted loss of $0.08 per share compared to adjusted EPS of $0.15 in 2018.
Segment quarterly results
| Segment | Q1 2020 Revenue | Change (YOY) |
|---|---|---|
| Product | $78.8 million | (15%) |
| Service | $55.9 million | (6.3%) |
| Total | $134.7 million | (11%) |
Data source: 3D Systems. YOY = year over year.
Here's how key categories performed:
- 3D printers (within product): Revenue dropped 36% year over year to $19.3 million.
- Healthcare solutions: Revenue fell 7.3% to $46.3 million. (This category spans both segments and overlaps other categories.)
- Materials (within product): Revenue was flat with the year-ago period at $41.4 million.
- Software (within product): Revenue declined 7.7% to $21.2 million.
- On-demand part manufacturing (within service): Revenue fell 13% to $19.7 million.
Materials revenue coming in flat with the year-ago period helped soften the pandemic's hit to profitability. This category has a considerably higher margin than the company's overall margin, so its sales have an outsize positive effect on profitability.
For context, last quarter, 3D printer revenue dropped 23% year over year, healthcare revenue fell 6%, materials revenue rose 7%, software revenue declined 10%, and on-demand manufacturing revenue fell 12%.
What management had to say
On the earnings call, CEO Vyomesh Joshi explained the main ways in which the company was hurt by the pandemic.
The first is end-user demand. Overall, capex [capital expenditure] spend is down across the industries we serve, including aerospace, automotive and healthcare, where elective surgeries have been canceled or delayed. This has affected demand for new hardware and associated software licenses. Second is the overall dental market, where demand has slowed as material consumption has slowed. ...
Next, within our own facility, there has been a supply chain disruption as we are a global company. Facilities in China couldn't operate for a period of time, and in Europe, some capacity was limited. Finally, we couldn't extend service technicians for installations because of our customer sites being closed.
Ideally, investors would know exactly what the company's year-over-year results looked like halfway through the quarter before it began being affected by what's now a pandemic. But that information wasn't shared -- though Joshi did say the company was doing "OK" until mid-February.
Looking ahead
3D Systems had a poor quarter, but this didn't come as a surprise given the pandemic's effect on both its customers and its supply chain.
Management expects continued challenges due to the crisis. It's taken the following main actions to help lessen the negative impact: cut executive and director pay by 10%, instituted temporary employee furloughs averaging two weeks, reduced hiring "significantly," and put on hold some research and development spending.
